UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___TO___
COMMISSION FILE NUMBER 0-20774
ACE CASH EXPRESS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-2142963
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1231 GREENWAY DRIVE, SUITE 800
IRVING, TEXAS 75038
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (972) 550-5000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- -------------------
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of September 23, 1997, 6,471,179 shares of Common Stock were outstanding. As
of such date the aggregate market value of voting stock (based upon the last
reported sales price in The Nasdaq Stock Market) held by nonaffiliates of the
registrant was approximately $83,627,246.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference from the
registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
PART I
ITEM 1. BUSINESS
GENERAL
Ace Cash Express, Inc. ("ACE" or the "Company") is a significant provider of
retail financial services in the United States. The Company is also the largest
owner and operator, and one of the largest franchisors of check cashing stores
in the United States. At August 15, 1997, the Company has a total network of
over 690 stores in 26 states, including 621 Company-owned stores and 73
franchised stores. The Company's growth strategy is to combine acquisitions,
new store openings and franchising in new and existing markets and to develop
new products for introduction into the existing store base. The Company's
general objective is to provide a full range of retail financial services and
transaction processing in its markets. Additionally, it is the Company's
objective to develop and maintain the largest network of stores in markets where
the Company operates. ACE intends to open 60 new stores, primarily in its
existing markets, during its fiscal year ending June 30, 1998.
ACE stores offer check cashing services and other retail financial services at
competitive rates in clean, convenient settings. Services include cashing
payroll checks, government checks and insurance drafts; selling Integrated
Payment Systems Money Orders; providing money transfer services using the
MoneyGram network; electronic filing of federal income tax returns; and
processing the related tax refund anticipation loans for customers from third-
party lenders. Many Company-owned stores also offer bill payment services,
lottery and lotto tickets, small consumer loans and other retail financial and
transaction processing services.
INDUSTRY OVERVIEW
The primary industry in which ACE operates is check cashing. Industry sources
indicate that there are approximately 6,100 check cashing stores nationally and
that there are five other check cashing companies operating over 100 stores and
three companies operating between 50 and 100 stores. The remaining check
cashing companies operate under 50 stores, with the majority of companies
operating fewer than 10 stores.
The Company believes that it and other check cashing companies that grew
during the last decade did so by offering services that banks do not fully
provide, at locations and during hours that are more convenient than those
traditionally offered by banks. Unlike many banks, check cashing stores are
willing to assume the risk that checks they cash will "bounce." For instance,
it is not unusual for a bank to refuse to cash a check for a customer who does
not maintain a deposit account with the bank and to require its depositors to
maintain sufficient funds in an account to cover a check to be cashed or wait
several days for the check to clear. As a result, the Company believes check
cashing stores provide an attractive alternative to customers without bank
accounts or with relatively small account balances. Although these customers
might save money by depositing their checks in a bank and waiting for them to
clear, many prefer paying a fee to take advantage of the convenience and
availability of immediate cash offered by check cashing stores.
The core business of check cashing stores is generally cashing checks for a
fee. These fees are intended to provide the check casher with a profit after
covering operating expenses, including any interest expense incurred by the
check casher on the funds advanced to customers between the time checks are
cashed and the time the checks clear through the banking system. The risk a
check cashing store assumes upon cashing a check is that the check will be
uncollected because of insufficient funds, stop payment orders or fraud. In
order to minimize this risk and the losses associated with uncollected checks,
many check cashing stores cash only payroll or government entitlement checks or
charge higher fees or have stricter approval procedures for cashing personal
checks. ACE does not promote the cashing of personal checks in its stores. For
the fiscal year ended June 30, 1997, less than 1% of the checks cashed by the
Company were one-party personal checks.
In addition to check cashing services, most check cashing stores offer
customers a range of other services, including money orders and wire transfers
of cash. Some check cashing stores also offer lottery and lotto tickets, public
transportation passes, income tax preparation, copying and fax transmission
services, travelers' checks
2
and postage stamps, welfare payment and food stamp distribution, small consumer
loans, and bill payment services.
The Company believes that the deregulation of the banking and savings-and-loan
industry has increased the role played by check cashing stores in providing
basic financial transaction services to low- and middle-income customers. At
the same time, the Company believes that competition, regulatory scrutiny and
complexity are contributing to consolidation of the industry. The Company's
strategy is to position itself to benefit from industry consolidation and the
competitive advantages available to large operators and franchisors of retail
financial services.
3
GROWTH STRATEGY
ACE's growth strategy consists principally of combining acquisitions and new
store openings with the objective to have the largest number of retail financial
services centers in each of its markets. Prior to June 30, 1994, ACE generally
limited its markets to major metropolitan areas with a minimum population over
500,000. ACE now defines its target markets as cities of 100,000 or more. The
Company has expanded from 181 Company-owned stores in five metropolitan areas as
of June 30, 1991, to 617 Company-owned stores in 47 market areas as of June 30,
1997. In fiscal 1997, the Company opened 45 stores, acquired 46 stores, and
closed 18 stores. The Company currently anticipates that it will open 60 new
stores in existing markets, during the fiscal year ending June 30, 1998.
The following table illustrates the development of Company-owned stores since
1991 by showing the number of stores open in each market area at the end of each
of the indicated periods:
COMPANY-OWNED STORES
----------------------------------------------------------------------
JUNE 30,
----------------------------------------------------------------------
MARKET AREA 1997 1996 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- ------- -------
TEXAS:
Dallas/Fort Worth/East Texas 114 112 103 98 91 83 76
Houston 74 72 60 55 50 40 35
San Antonio/Austin/El Paso 42 28 24 23 20 18 17
COLORADO:
Denver 31 28 27 21 23 23 21
Colorado Springs/Pueblo 13 13 12 9 9 9 7
MARYLAND/WASHINGTON,D.C./VIRGINIA:
Baltimore/Washington,D.C./
Alexandria/Roanoke/Lynchburg 72 74 71 62 49 35 25
GEORGIA:
Atlanta/Albany/Augusta/Macon/
Savannah 47 47 49 42 15 2 -
LOUISIANA:
New Orleans/Baton Rouge/Shreveport 25 19 19 14 14 7 -
ARIZONA:
Phoenix/Tucson 58 46 37 4 5 3 -
FLORIDA:
Jacksonville/Orlando/Palm Beach/Tampa 46 38 - - - - -
NORTH & SOUTH CAROLINA:
Charlotte/Charleston/Columbia/
Greenville/Spartanburg/Orangeburg 16 16 15 11 - - -
OHIO:
Cleveland 10 8 7 4 - - -
OKLAHOMA:
Oklahoma City 13 12 12 - - - -
NEW MEXICO:
Albuquerque 7 7 7 - - - -
ARKANSAS:
Little Rock 6 6 4 - - - -
MISSOURI:
St. Louis 6 3 3 - - - -
TENNESSEE:
Memphis/Nashville 15 5 2 - - - -
WASHINGTON:
Seattle 8 6 - - - - -
INDIANA:
Indianapolis 9 4 - - - - -
OREGON:
Portland 5 - - - - - -
----- ----- ----- ----- ----- ------ ----
TOTAL 617 544 452 343 276 220 181
===== ===== ===== ===== ===== ====== ====
4
Acquisitions. The Company maintains an acquisitions department in order to
identify, negotiate and close transactions. During fiscal 1997, the Company
acquired 46 stores in 20 separate transactions. The Company believes its
experience with acquisitions permits it to successfully integrate additional
acquisitions. The Company currently intends to continue searching for strategic
opportunities in both existing and new markets.
FRANCHISE OPERATIONS
With the acquisition of Check Express, Inc. and its wholly owned
franchising subsidiaries in February 1996, the Company became one of the largest
franchisors of check cashing stores in the United States. In fiscal 1996, ACE
created the ACE Franchise Group, to service and market new ACE franchises. ACE
franchises are being marketed through a commissioned sales force, supplemented
by newspaper, trade journals and other advertising media. As of August 15,
1997, there were 73 Company-franchised stores open and operating in 20 states,
located as follows:
Number of stores
California 14
Texas 14
Florida 11
Georgia 7
Washington 5
Louisiana 3
North Carolina 3
Kansas 2
Ohio 2
Tennessee 2
Other states (10) 10
--
Total 73
--
The Company intends to continue its expansion through the sale of new franchises
and the opening of additional units under existing franchise agreements. The
Company is actively marketing several types of Ace Cash Express franchises
depending on the style of business being conducted. These include a standard
store franchise, a store-within-a-store (or "kiosk") franchise, and a conversion
franchise that permits an existing check cashing business to convert to an ACE
franchisee. The Company sold 34 franchises, opened 26 new franchises and
acquired 20 former franchises in fiscal 1997. The majority of franchises operate
under the "ACE" name.
CUSTOMERS AND SERVICES
Management believes the Company's core customer group is comprised primarily
of individuals whose average age is 34 and who rent their house or apartment and
hold a wide variety of jobs in the service sector, or are clerical workers,
craftsmen and laborers. These customers tend to change jobs and residences more
often than average, have annual family incomes under $35,000, often pay their
bills with money orders and prefer the availability of immediate cash provided
by cashing checks at the Company's stores.
5
The following table reflects the major categories of services that ACE
currently offers and the revenues (in thousands) from these services for the
indicated fiscal years:
REVENUE CATEGORY 1997 1996 1995 1994 1993
------------------------- ------------- ------------- ------------- ------------- -------------
Check cashing $62,835 $51,327 $37,488 $31,828 $26,927
Money transfers 5,749 4,740 1,775 1,155 545
Loan fees and interest 5,703 2,462 597 164 49
Money orders 2,757 2,413 2,089 1,800 1,437
Bill payment services 2,197 1,320 819 425 455
New customer fees 2,051 1,338 806 504 416
Franchise revenues 1,398 633 - - -
Other fees 4,702 4,726 4,216 4,026 2,837
------------- ------------- ------------- ------------- -------------
Total $87,392 $68,959 $47,790 $39,902 $32,666
============= ============= ============= ============= =============
Check cashing. ACE's primary business is cashing checks for a fee. The
principal type of check the Company cashes is a payroll check. The Company also
cashes government assistance, tax refund checks and insurance checks or drafts.
In order to control the risk of loss, the Company normally does not cash two-
party personal checks. Subject to market conditions at different locations, the
Company's check cashing fees for payroll checks generally range from $0.99 to
$6.39 for checks with face amounts up to $400, and for checks greater than that
amount, the fee is generally 1.6% of the face amount of the check plus a $0.99
processing fee. The Company imposes a surcharge of 1/2% to 2% of the face
amount of the check for cashing out-of-state checks, handwritten checks, money
orders, tax refund checks and insurance checks or drafts. Unlike many of its
competitors, the Company displays its check cashing fees in full view of its
customers on a "menu board" in each store and provides a detailed receipt for
each transaction. Although the Company has established guidelines for approving
check cashing transactions, it has no preset limit on the size of the checks it
will cash.
If a check cashed by the Company is not paid for any reason, the Company
accounts for the amount of the check as a loss in the period in which it is
returned. ACE then transfers the check to its collection department, which
contacts the maker and/or payee of each returned check and, if necessary,
commences legal action. The collection department utilizes an automated
tracking system on the Company's central computer system to monitor the status
of all returned items. See "Selected Financial Data -- Collections Data."
Money transfers. ACE is an agent for the transmission and receipt of wire
transfers through the MoneyGram network. Through this network, ACE customers can
transfer funds electronically to any of over 14,000 MoneyGram locations
nationwide (including other ACE stores) and 20,000 locations worldwide.
MoneyGram establishes the fees for this service, and the Company is paid a
percentage of the fees it collects from customers as a commission and remits the
balance to MoneyGram.
Loan fees and interest. The Company is engaged in the small consumer loan
business, offering short-term loans to individuals. Company management believes
much of its existing base of check cashing and other customers may have limited
access to other sources of consumer credit.
ACE is a licensed provider of small consumer loans in Colorado, Florida,
Indiana, Louisiana, Missouri, New Mexico, Oklahoma, Texas, and Washington. Where
permitted by law, the Company offers a standardized, single installment loan
ranging from $50 to $580 (averaging $134) through its post-dated check product.
Through this product, ACE permits a customer to receive a cash advance for a
fee, secured by a post-dated personal check. Such a loan generally has a term
of two to four weeks. As of August 15, 1997, this product was offered in 179 of
the Company's stores. On a test basis, ACE also currently offers an unsecured
single-installment loan up to $200 in two of its Colorado stores and multiple
installment loans up to $450 in an additional 51 stores in Texas.
Small consumer loan products are offered in a highly structured regulatory
environment. Each ACE store which offers consumer loans is individually
licensed under state laws, which establish allowable interest rates,
6
fees and other charges on small loans made to consumers. In addition, many
states regulate the maximum principal amounts and maturities of these loans.
Money orders. The Company sells Integrated Payment Systems ("IPS") Money Orders
in denominations up to $1,000. These money orders are generally used by the
Company's customers for bill payments, rent payments and other general
disbursements. The Company sold 13.6 million, 11.8 million and 9.3 million
money orders during the 1997, 1996, and 1995 fiscal years, respectively. The
face amount of money orders sold as a percentage of the face amount of checks
cashed was 69.1% in 1997, 71.4% in 1996 and 76.8% in 1995. The fees charged for
money orders depend on local market conditions and the size of the money order.
The Company remits the face amount of each money order sold and pays a fee to
the Money Order Supplier (as defined hereafter) for each money order sold.
ACE's money order revenues include only that portion of the fees retained by the
Company.
Bill payment services. The Company's stores serve as payment centers for
customers to pay their utility, telephone, and other bills. The Company remits
the amount owed to the appropriate companies under various contractual
agreements, and either retains a service fee or collects a fee from the
consumer.
New customer fees. The Company charges a one-time fee for new check cashing
customers to cover the costs of the initial setup in the ACE customer database
and identification verification.
Franchise revenues. The Company's franchise revenues represent royalties,
initial franchise fees and buyback fees from its Franchisees. There were 73
Company-franchised stores in operation as of June 30, 1997.
Other services and products. In addition to the above, in some Company-owned
stores ACE offers a variety of other retail financial products and services to
its customers, including electronic tax return filing, lottery and lotto ticket
sales, food stamp distribution, public transportation passes, copying and fax
transmission services and postage stamps, pagers, prepaid long distance
telephone cards and prepaid local phone service.
STORE OPERATIONS AND NEW STORE ECONOMICS
The Company's objective is to locate its owned stores in highly visible and
accessible locations and to operate them during convenient hours. The Company
attempts to locate stores on high traffic streets or intersections, in many
cases in or near destination shopping centers. The Company's stores occupy 1,100
square feet on average and are located in strip shopping centers, free-standing
buildings and kiosks located inside major retail stores (for example, two Wal-
Mart Super Stores in the Dallas/Fort Worth area). The Company is focused on
increasing the market's awareness of ACE by using consistent signage and design
at each store location. All but one of the locations of the Company-owned
stores are leased.
Normal business hours of the Company-owned stores are from 9:00 a.m. until
7:00 p.m., Monday through Thursday, 9:00 a.m. until 8:00 p.m. on Friday and 9:00
a.m. until 6:00 p.m. on Saturday. Currently, 127 stores are also open on
Sunday, generally from 10:00 a.m. until 5:00 p.m., and seven stores are open 24
hours. The business hours of any store may be changed due to local market
conditions.
The Company has a store construction and facilities planning staff that
supervises the construction of new stores and the remodeling of existing stores,
and performs lease management. Although size, shape and design may vary from
store to store since many of the stores are built out of existing space, the
work area of each store is a modular-designed unit that can be customized to
meet the requirements of each location while giving a uniform appearance. These
modular units may be moved from one location to the next, thus reducing the
costs associated with opening new stores and relocating existing stores.
The tables below show the average annual store revenues and the average store
contribution for Company-owned stores that have remained open since June 30,
1987, and for stores that have been opened and have remained open since that
date.
7
REVENUES
YEAR ENDED JUNE 30,
NUMBER OF ($ in thousands)
STORES OPEN AT ------------------------------------------------------------------------------
YEAR OPENED: JUNE 30, 1997 1997 1996 1995 1994 1993
--------------------- ----------- ------------ ------------ ------------ -----------
1988 and earlier 78 $162.7 $156.4 $150.6 $154.6 $153.0
1989 25 150.2 146.5 144.9 138.5 137.1
1990 30 138.1 132.0 132.7 136.3 141.3
1991 17 145.7 134.2 129.4 131.1 124.1
1992 23 171.6 149.1 140.6 134.6 116.6
1993 39 139.2 124.8 113.7 96.5 39.1
1994 38 127.7 108.8 88.1 33.9 -
1995 39 105.1 79.9 26.7 - -
1996 32 106.5 32.2 - - -
1997 45 33.4 - - - -
---------------------
366
Acquired stores 251
---------------------
617
STORE CONTRIBUTION (1)
YEAR ENDED JUNE 30,
NUMBER OF ($ in thousands)
STORES OPEN AT ---------------------------------------------------------------------------
YEAR OPENED: JUNE 30, 1997 1997 1996 1995 1994 1993
--------------------- ----------- ------------ ------------- ------------ -----------
1988 and earlier 78 $ 62.5 $58.9 $ 54.6 $59.6 $59.4
1989 25 57.3 59.0 51.1 48.1 48.9
1990 30 40.8 39.3 35.9 40.9 43.2
1991 17 46.8 42.6 40.9 44.0 34.3
1992 23 66.7 48.4 39.5 36.4 25.7
1993 39 45.8 34.2 23.4 12.2 (6.7)
1994 38 40.1 25.8 8.5 (6.9) -
1995 39 15.3 (3.4) (14.3) - -
1996 32 7.7 (6.7) - - -
1997 45 (14.1) - - - -
---------------------
366
Acquired stores 251
---------------------
617
(1) "Store contribution" equals revenues less direct store expenses and
store-related depreciation and amortization. Direct store expenses
consist of store salaries and benefits, occupancy costs (rent,
maintenance, taxes and utilities), returned checks net of collections,
cash shortages, armored security costs and bank charges. Direct store
expenses exclude region or corporate overhead and depreciation and
amortization expenses.
The capital cost of opening a new store varies depending on the size and type
of store. During fiscal 1997, the Company opened 45 stores at an average capital
cost of approximately $50,100 per store.
There can be no assurance that the Company's stores will continue to generate
the same level of revenues or rate of growth in revenues as in the past or that
any new or acquired store will perform at a level comparable to any of the
Company's existing stores.
8
ADVERTISING AND MARKETING
ACE believes that its most effective advertising is through in-store programs,
combining the selling efforts of store personnel with point-of-sale materials.
The Company emphasizes courteous service and encourages service associates to
recognize and develop good relationships with their customers. Through its
standard signage, store design and area maps, the Company attempts to foster an
image that attracts customers and inspires customer confidence. The Company
also benefits from vendor-sponsored media advertising in some markets.
SUPERVISION AND TRAINING
The Company is organized in "regions," which generally correspond to the
market areas in which ACE operates its stores. Each region has a regional vice
president ("RVP") who is responsible for the operations, administration,
training and supervision of the Company-owned stores in his or her region. The
Company currently has 11 RVP's who supervise an average of 56 stores each. The
RVP's report to one of two division vice presidents. The Company currently has
49 district supervisors, each of whom reports to the RVP for his or her region
and is directly responsible for the general management of 6 to 30 stores within
his or her territory. These district supervisors are responsible for
operations, training, scheduling, marketing and staff motivation. Each store
manager reports to a district supervisor, has direct responsibility over his or
her store's operations and supervises the service associates who staff the
stores.
Service associates, managers, district supervisors and RVP's must complete
formal training programs conducted by the Company. ACE has a uniform, Company-
wide training program, with higher-level training conducted at the corporate
office and new-hire training conducted in each regional office by corporate-
trained personnel. The purpose of this training, which covers topics ranging
from customer service to loss reduction, is to improve the Company's delivery of
products and services.
POINT-OF-SALE SYSTEM
ACE has developed and implemented a proprietary personal computer based point-
of-sale system, which has been fully operational in all Company-owned stores
since 1991. In addition to other management information and control functions,
ACE's point-of-sale system allows the Company to:
1) capture, analyze and update on a daily basis data relating to customers and
transactions, including the makers of cashed checks, which allows the
Company to provide service associates with on-demand access to current
information for use in approving check cashing transactions;
2) utilize an automated decision methodology to guide service associates to
take appropriate actions to manage risk in check cashing transactions;
3) monitor daily revenues by product or service on a Company, divisional,
regional, per store or per employee basis;
4) monitor and manage daily store exception reports, which record, for
example, any cash shortages and late store opening times;
5) identify cash differences between bank statements and the Company's records
(such as differences resulting from missing items and deposits);
6) determine, on a daily basis, the amount of cash needed at each store
location, allowing centralized cash management personnel to maintain the
optimum amount of cash inventory in each store;
7) reduce the risk of transaction errors by, for example, automatically
calculating check cashing and other transaction fees;
8) provide products and services in a standardized and efficient manner, which
the Company believes allows it to operate its stores with fewer personnel
than many of its competitors (with many of the Company's stores being
operated by only one person); and
9) facilitate compliance with regulatory requirements.
9
The data captured by the point-of-sale system is transmitted daily from each
store to a centralized database maintained at ACE's headquarters and is
automatically integrated into its general ledger system.
SECURITY
All Company-owned store employees work behind bullet-resistant Plexiglas and
steel partitions. Each Company-owned store's security measures include safes,
alarm systems monitored by third parties, teller area entry control, perimeter
opening entry detection, and tracking of all employee movement in and out of
secured areas. In addition, as security contracts expire and new stores are
opened, the Company is centralizing its security measures to strengthen and
improve control over physical security. As of August 15, 1997, 87% of the
Company's stores have been integrated into the centralized security system. The
centralized system includes the following security measures in addition to those
described above: identical alarm systems in all stores, remote control over
alarm systems, arming/disarming and changing user codes, and mechanically and
electronically controlled time-delay safes.
Since ACE's business requires it to maintain a significant supply of cash in
its stores, the Company is subject to the risk of cash shortages resulting from
theft and employee errors. Although the Company has implemented various programs
to reduce these risks and provide security for its facilities and employees,
there can be no assurance that these problems will be eliminated. During the
1997 and 1996 fiscal years, cash shortages from employee errors and from theft
were $1,762,000 (2.0% of revenues) and $1,572,000 (2.3% of revenues),
respectively.
The Company's point-of-sale system allows management to detect cash shortages
on a daily basis. In addition to other procedures, district supervisors conduct
random audits of each Company-owned store's cash position and inventories on an
unannounced random basis.
Daily transportation of currency and checks is provided by nationally
recognized armored carriers, such as Loomis, Fargo & Company. ACE employees are
not authorized to transport currency or checks.
EMPLOYEES
At June 30, 1997, ACE employed 1,558 persons: 774 center employees, 552 center
managers, 68 corporate personnel, 11 regional vice presidents, 93 regional
personnel, 49 district supervisors, and 11 franchise personnel. Third-party
firms hired by the Company conduct background checks of the Company's new hires.
The Company considers its employee relations to be good. ACE's employees are
not covered by a collective bargaining agreement, and the Company has never
experienced any organized work stoppage, strike or labor dispute. Generally,
the Company's employees are not bonded.
COMPETITION
The Company believes that the principal competitive factors in the check
cashing industry are locations, customer service, fees, convenience and products
and services offered. The Company faces intense competition and believes that
the check cashing market will become more competitive as the industry matures.
The Company competes with other check cashing stores, grocery stores, banks,
savings and loans and other financial services entities and any retail
businesses that cash checks, sell money orders or provide money transfer
services or other products and services offered by the Company. Certain
competitors of the Company that are not check cashing stores cash checks without
charging a fee under limited circumstances. Some of the Company's competitors
that are not check cashing companies have larger and more established customer
bases and substantially greater financial, marketing and other resources than
the Company. There is no assurance that the Company will be able to compete
successfully with its competitors.
10
TRADEMARKS
The Company has obtained the federal trademark registration of "A-C-E
America's Cash Express (R)", and the federal trademark registration of its logo.
REGULATION
General. The Company is subject to regulation in several jurisdictions in
which it operates, including jurisdictions that regulate check cashing fees,
require prompt remittance of money order proceeds to money order suppliers or
require the registration of check cashing companies or money transmission
agents. In addition, ACE is subject to federal and state regulation relating to
the reporting and recording of certain currency transactions.
State Regulations. Several states have licensing and/or fee regulation on
check cashing fees, including California, Connecticut, Delaware, Florida,
Georgia, Illinois, Indiana, Kentucky, Massachusetts, Minnesota, New Jersey, New
York, Ohio, Rhode Island, Virginia, Washington and Wisconsin. The Company is
licensed in each of the states in which a license is currently required for it
to operate as a check-cashing company. The ceilings on fees adopted by Georgia
and Ohio -- the only states that regulate such fees in which the Company
operated as of June 30, 1997 -- are in excess of the fees charged by the
Company. The fee ceilings in effect in certain states (Delaware, New Jersey and
New York, for example) currently make operations in those states less attractive
to the Company
As of June 30, 1997, the Company operated a total of 86 stores in two states -
- - Georgia and Maryland -- that have so-called "prompt remittance" statutes.
These statutes specify a maximum time for the payment of proceeds from the sale
of money orders to the issuer of the money order. See "Business --
Relationships with the Money Order Supplier and MoneyGram Supplier." In
addition, in some jurisdictions, check cashing companies or money transmission
agents are required to meet minimum bonding or capital requirements and are
subject to record-keeping requirements.
The adoption of check cashing fee ceilings and prompt remittance statutes in
additional jurisdictions could have an adverse effect on the Company's business,
and existing fee ceilings and prompt remittance statutes could restrict the
ability of the Company to expand its operations into certain states.
Federal Regulation. Under the Bank Secrecy Act regulations of the U.S.
Department of the Treasury (the "Treasury Department"), transactions involving
currency in an amount greater than $10,000 or the purchase of monetary
instruments for cash in amounts from $3,000 to $10,000 must be recorded. In
general, every financial institution, including the Company, must report each
deposit, withdrawal, exchange of currency or other payment or transfer, whether
by, through or to the financial institution, that involves currency in an amount
greater than $10,000. In addition, multiple currency transactions must be
treated as single transactions if the financial institution has knowledge that
the transactions are by, or on behalf of, any person and result in either cash
in or cash out totaling more than $10,000 during any one business day.
Management believes that the Company's point-of-sale system and employee
training programs are essential to the Company in complying with these statutory
requirements and may give the Company a competitive advantage.
In September 1994, the United States Congress passed the Money Laundering
Suppression Act of 1994, which, among other things, contemplated the
registration of "money services businesses," which includes check cashers like
the Company, with the Treasury Department. That registration requirement has
been suspended, however, until 90 days after the effective date of regulations
implementing that act. In 1997, the Financial Crimes Enforcement Network of the
Treasury Department ("FinCEN") proposed implementing regulations for comment.
Representatives of the Company have reviewed those proposed regulations and
communicated their comments to a national check cashers trade association that
has had contact with representatives of FinCEN. Though the registration
requirements that are finally adopted may differ from those that have been
proposed, management of the Company does not believe that compliance with the
proposed requirements would have any material impact on the Company's
operations.
11
In 1997, FinCEN also proposed for comment two additional sets of regulations
implementing the Bank Secrecy Act that could affect the Company. One of those
proposed sets of resolutions requires "money transmitters" and their "agents" to
report and keep records, and verify the senders, of transactions in currency or
monetary instruments of at least $750, but not more than $10,000, in connection
with the transfer of funds to a person outside the United States. As a member
of the MoneyGram system, the Company would be an agent of a money transmitter
for this set of regulations. The second proposed set of regulations would
require businesses issuing, selling, or redeeming money orders or travelers'
checks, like the Company, to report to the Treasury Department "suspicious
transactions." Representatives of the Company have also reviewed and
communicated comments on these two sets of proposed regulations. Although the
regulations that are finally adopted may differ from those that have been
proposed, management believes that the Company's point-of-sale system would
enable the Company to comply with the regulations and that the principal effect
of the regulations would be a greater emphasis in the Company's training
programs on money transmission reporting and identification of suspicious
transactions.
RELATIONSHIPS WITH THE MONEY ORDER SUPPLIER AND MONEYGRAM SUPPLIER
Money Orders. Most of the Company's funds for the operation of its check
cashing business, ACE's primary business, are derived from the sale of
Integrated Payment Systems (the "Money Order Supplier") money orders under the
terms of the Company's 1992 Master Agreement, as amended (the "Money Order
Agreement"). The Money Order Agreement provides for the payment of certain fees
to the Money Order Supplier in connection with the sale of money orders by the
Company and requires the Company to remit proceeds from money order sales to the
Money Order Supplier in accordance with a deferred remittance schedule. In
addition, the Money Order Agreement provides a commitment by the Money Order
Supplier to make certain advances to the Company, including revolving commitment
advances that are related to the Company's expansion and acquisition of new
stores ("Term Advances"). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and Note
4 of Notes to Consolidated Financial Statements.
Upon the sale of a money order, the Company collects from its customer the
face amount of the money order and a fee charged by the Company. The Company in
turn remits the face amount of the money order sold and pays a fee to the Money
Order Supplier (the "Money Order Fee") for each money order sold. The Money
Order Fee is subject to adjustment from time to time under the terms of the
Money Order Agreement upon changes in the prime rate above 11% and as may be
required by applicable law. No such adjustments have ever occurred.
The Money Order Agreement requires the Company to remit "Money Order Proceeds"
(consisting of Money Order Fees and the face amount of money orders sold) to the
Money Order Supplier in accordance with a schedule that permits limited
remittance deferrals. Prior to the Company's remittance of these proceeds to
the Money Order Supplier, the Company uses the proceeds to make change in the
ordinary course of its business, including when cashing checks. The period
within which the Company must remit the Money Order Proceeds to the Money Order
Supplier varies depending on whether the store is located in a jurisdiction with
a statute that specifies a maximum time period for the payment of money order
proceeds to the issuer of the money order (a "prompt remittance jurisdiction")
or is located in a jurisdiction in which there is no specified maximum period
for the payment of money order proceeds to the issuer of the money order (a
"non-prompt remittance jurisdiction"). The Money Order Agreement provides for a
smaller Money Order Fee for money orders sold in prompt remittance jurisdictions
than in non-prompt remittance jurisdictions.
The Money Order Agreement contains certain restrictive covenants affecting the
Company, and the Company's obligations under the Money Order Agreement are
secured by liens on all its assets. If it becomes unlawful for the Money Order
Supplier to honor its obligations to make Term Advances or any other advances to
the Company, the Money Order Supplier may terminate such obligations and require
the Company to prepay any outstanding Term Advances and other advances within
180 days, or such shorter period as may be required by governmental authority.
In such event, the Company may terminate the Money Order Agreement on 30 days'
12
notice to the Money Order Supplier and must prepay any outstanding Term Advances
and other advances no later than the date the Money Order Agreement terminates.
If the Company were required to prepay outstanding Term Advances and other
advances upon short notice and were unable to obtain alternate sources of
financing on comparable terms, it might be unable to repay such advances within
the required time frame. In addition, such requirement might have a material
adverse effect on the Company's liquidity, expansion program and operating
results. In addition, the Company's ability to pay dividends is limited to the
greater of (i) 20% of the earnings of the Company for the immediately preceding
fiscal year and (ii) 10% of cumulative earnings of the Company after August 30,
1992 up to $1.0 million annually; provided that the payment of any dividend does
not cause a default under any other covenant in the Money Order Agreement.
The Money Order Agreement will expire on December 31, 1998, but may be
terminated by the Money Order Supplier before that date for several reasons,
including (i) upon a change of control of the Company, (ii) after a default by
the Company that is not cured, (iii) after 180 days' notice, if a court or
regulatory authority determines that it is unlawful for the Money Order Supplier
to participate in the Money Order Agreement or if any material provision of the
Money Order Agreement is determined to have a potential material adverse
financial or tax consequence to the Money Order Supplier or (iv) upon a
reasonable determination by the Money Order Supplier that there has been a
material adverse change in the financial condition of the Company.
On July 13, 1995, the Company and the Money Order Supplier entered into an
agreement relating to the stores acquired from Quick Cash, Inc. In connection
with this agreement, the Money Order Supplier made a $972,000 non-refundable
advance payment to the Company on July 17, 1995. The Company has deferred
recognition of the advance payment and is amortizing it to revenues over the 42-
month guarantee period ending December 31, 1998. Further, the Money Order
Supplier agreed to guarantee revenues from providing MoneyGram wire transfers at
the annual rate of $1,080,000. This amount is equivalent to the annual
aggregate wire transfer revenue for the acquired stores derived from another
supplier. The guarantee period expires on December 31, 1998, unless the Master
Agreement is extended. In such case, the guarantee period is extended to
coincide with the extension of the Master Agreement, with a maximum extension
date of August 30, 2000. See Notes 3 and 4 of Notes to Consolidated Financial
Statements.
MoneyGram Services. On February 1, 1996, the Company and the Money Order
Supplier entered into (i) a letter agreement to establish the maximum aggregate
amount of the Term Advances available to the Company at $18.5 million and (ii)
the 1996 MoneyGram Master Agreement to govern their relationship regarding money
transfer services. When executed, that 1996 MoneyGram Master Agreement
contained substantially the same terms regarding MoneyGram money transfer
services as those then set forth in the Money Order Agreement (which ceased to
apply to those services), except that it permitted the Money Order Supplier to
assign its rights and obligations thereunder to any of its affiliates, including
First Data Corporation ("FDC") or its subsidiary Integrated Payment Systems Inc.
("IPS") or affiliate MoneyGram Payment Systems, Inc. ("MPS").
Since its execution, that 1996 MoneyGram Master Agreement has been amended (as
so amended, the "MoneyGram Agreement") in certain respects. The term of the
MoneyGram Agreement has been extended for two additional years, to December 31,
2000. The Company also received an initial bonus of $2 million in fiscal 1996.
The initial bonus was deferred and included in other liabilities in the
Company's consolidated balance sheet. The bonus is being amortized to revenues
on a straight-line basis over the five-year term of the MoneyGram Agreement.
The MoneyGram Agreement also provides for incentives for opening new MoneyGram
service locations after January 1, 1996, and other performance incentives for
the Company. During the year ended June 30, 1997, $1.4 million of amortization
related to other performance incentives was recorded and included in money
transfer services revenue.
In connection with FDC's 1995 acquisition of Western Union Financial Services,
Inc. (which owns and operates the consumer money transfer service operated under
the "Western Union" tradename), FDC entered into a consent order with the
Federal Trade Commission that required FDC to hold separate the consumer money
transfer service
13
operated under the "MoneyGram" tradename pending its divestiture and to divest
that service by the end of 1996. Before that divestiture, the Company's dealings
with FDC or IPS regarding the MoneyGram service were with a separate group or
persons within FDC or IPS responsible for that service. FDC divested MoneyGram
on December 11, 1996 through an Initial Public Offering. The Company has been
dealing with MoneyGram exclusively for its money transfer services since the
divestiture.
The Company expects that, until at least December 31, 1998, it will be a party
both to the MoneyGram Agreement and to the Money Order Agreement. Accordingly,
the Company will sell IPS Money Orders and be entitled to Term Advances through
FDC, the owner and operator of the Western Union service, the largest competitor
of the MoneyGram service in the consumer money transfer services market. There
can be no assurance that (i) the Company's competition with the Western Union
service through its sale of the MoneyGram service will not have an adverse
effect on the Company's relationship with FDC or its ability to obtain Term
Advances to fund the expansion of its business, including the offering of the
MoneyGram service, or (ii) FDC will not use its knowledge of the operations of
the MoneyGram service to cause the Western Union service to be a more effective
competitor in the consumer money transfer services market.
ARRANGEMENTS REGARDING SECURED NOTES
In December 1996, the Company consummated a private placement of $20 million
of its 9.03% Senior Secured Notes ("Notes") and issued the Notes to Principal
Mutual Life Insurance Company ("Principal Mutual") under the terms of a Note
Purchase Agreement dated as of November 15, 1996 (the "Note Purchase
Agreement"). The net proceeds of the issuance of the Notes were used to pay in
full the then outstanding $18.5 million principal of the Term Advances from the
Money Order Supplier, plus all accrued interest thereon and fees in connection
therewith, and for general corporate purposes of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
Interest on the unpaid principal amount of the Notes, accruing at 9.03% per
annum, is payable semiannually on May 15 and November 15 of each year,
commencing May 15, 1997. The principal amount of the Notes is payable in five
equal installments of $4 million on November 15 of each year, commencing
November 15, 1999. All principal and accrued interest is payable at the
scheduled maturity of the Notes on November 15, 2003.
The Company may prepay the Notes, at any time or from time to time, in the
principal amount of at least $1 million, plus accrued interest on the principal
amount being prepaid, plus an amount approximately equal to the discounted
present value of the return that the holders of the prepaid Notes would have
received if the prepayment were not made. Any prepayment will ratably reduce
the amount of each scheduled principal payment on the Notes due thereafter.
The Note Purchase Agreement contains certain restrictive covenants affecting
the business and affairs of the Company and its subsidiaries. Those covenants
address, among other things, the maintenance of specified financial ratios, the
incurrence and payment of other indebtedness, the disposition of assets or of
the ownership of any subsidiary of the Company, the grant or existence of other
liens on the assets of the Company and its subsidiaries, and transactions
between the Company or its subsidiaries and any of their affiliates.
The Note Purchase Agreement also specifies events of default that could result
in the acceleration of the maturity of the Notes. Those events include (a) any
failure by the Company to pay any amount due under the Notes, (b) any failure by
the Company to comply with various covenants set forth in the Note Purchase
Agreement and ancillary documents, (c) any misrepresentation or breach of
warranty by the Company, (d) any failure by the Company or any of its
subsidiaries to pay, or perform its obligations under, any indebtedness for
borrowed money or under capital leases in excess of $1 million, including
obligations to the Money Order Supplier, (e) various events of bankruptcy or
insolvency of the Company or any of its subsidiaries, and (f) any final
judgement of any court in excess of $1 million against the Company or any of its
subsidiaries remaining in effect 30 days after the entry thereof.
14
The Company's obligations under the Notes, the Note Purchase Agreement, and
all ancillary documents entered into with Principal Mutual are secured by liens
on all of the assets of the Company. Concurrent with the Note Purchase
Agreement, the Company entered into a Collateral Trust Agreement dated as of
November 15, 1996 (the "Collateral Trust Agreement"), with Wilmington Trust
Company, as trustee (the "Collateral Trustee"), and the Company's two secured
lenders, Principal Mutual and the Money Order Supplier. The Collateral Trust
Agreement creates a collateral trust to secure the Company's obligations to both
of its existing secured lenders and, under conditions set forth therein, any
future secured lenders to the Company. The Collateral Trust Agreement includes
agreements regarding the priority of distributions to the secured lenders upon
foreclosure and liquidation of the collateral subject thereto and certain other
intercreditor arrangements. Under the Collateral Trust Agreement, the Money
Order Supplier has priority with respect to deferred money order remittances,
and all secured lenders otherwise share in the collateral on a pro rata basis.
Also concurrent with the Note Purchase Agreement, the Company and the Money
Order Supplier entered into an amendment to the Money Order Agreement under
which, among other things, (a) the Company agreed that its obligations to the
Money Order Supplier under the Money Order Agreement would be cross-defaulted to
its obligations to Principal Mutual and the Collateral Trustee, (b) the Company
agreed to pay in full all then outstanding Term Advances, including all accrued
interest thereon and fees in connection therewith, and (c) the Money Order
Supplier agreed to continue to make the Term Advance facility available to the
Company on substantially on the same terms as before.
ITEM 2. PROPERTIES
All but one of the Company's stores are leased, generally under leases
providing for an initial term of three years and renewal terms of from three to
six years. The Company acquired, as part of the Check Express acquisition in
February 1996, and still owns the land and building at which one of the
Company's stores is located in Indianapolis, Indiana; management believes that
the land and building are suitable for the successful operation of a store of
the Company. The Company's headquarters offices in Irving, Texas, a suburb of
Dallas, occupy approximately 40,000 square feet under a 62-month lease, the term
of which expires in April 2001.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings incidental to the conduct
of its business. Management believes that none of these legal proceedings will
result in any material impact on the Company's financial condition and results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders of the Company during
the fourth quarter of fiscal 1997.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is quoted on The Nasdaq Stock Market ("NASDAQ")
under the symbol "AACE". At August 15, 1997, there were approximately 1,200
holders of record of the Common Stock.
The following table sets forth the high and low sale prices of the Common
Stock as reported by NASDAQ for the past two fiscal years (as adjusted to
reflect the three-for-two stock split effected in the form of a 50% stock
dividend distributed to shareholders of record as of November 15, 1996):
HIGH LOW
------ ------
Fiscal 1996
-----------
Quarter ended September 30, 1995 7-7/8 5-7/8
Quarter ended December 31, 1995 7-3/8 6-3/16
Quarter ended March 31, 1996 9-5/8 6-3/16
Quarter ended June 30, 1996 11 9-3/16
Fiscal 1997
-----------
Quarter ended September 30, 1996 10 8-3/8
Quarter ended December 31, 1996 14-5/8 9-5/8
Quarter ended March 31, 1997 13-1/8 10-1/8
Quarter ended June 30, 1997 13-1/4 9-3/4
On August 15, 1997, the last reported sale price of the Common Stock on the
NASDAQ was $15.75 per share.
The Company has never paid dividends on the Common Stock and has no plans to pay
dividends in the foreseeable future. In addition, the Company's ability to pay
cash dividends is limited under the Money Order Agreement. See " Business --
Relationships with the Money Order Supplier and MoneyGram Supplier."
16
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED JUNE 30,
--------------------------------------------------------------
1997 1996 1995 1994 1993
-------- ---------- --------- --------- ---------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues $ 87,392 $ 68,959 $47,790 $39,902 $32,666
Store expenses 59,376 48,552 35,584 28,757 23,003
Region expenses 7,477 5,647 4,139 3,531 2,910
Headquarters expenses 6,106 4,744 3,651 3,392 3,401
Franchise expenses 1,046 458 - - -
Other depreciation and amortization 3,024 2,152 1,219 1,032 730
Interest expense (income), net 2,271 1,714 103 (173) 175
Other expenses 213 236 28 125 27
-------- -------- ------- ------- -------
Income before income taxes, extraordinary item and
cumulative effect of change in accounting principle 7,879 5,456 3,066 3,238 2,420
Income taxes 3,113 2,130 1,076 1,077 883
-------- -------- ------- ------- -------
Income before extraordinary item and cumulative effect
of change in accounting principle 4,766 3,326 1,990 2,161 1,537
Extraordinary item - utilization of net operating loss
carryovers - - - - 715
Cumulative effect of change in accounting for income
taxes - - - 88 -
------- -------- ------- ------- -------
Net income $ 4,766 $ 3,326 $ 1,990 $ 2,249 $ 2,252
======= ======== ======= ======= =======
Earnings per share (1):
Earnings before extraordinary item and cumulative
effect of change in accounting principle $ .73 $ .52 $ .32 $ .35 $ .29
Extraordinary item - utilization of net operating loss
carryovers - - - - .14
Cumulative effect of change in accounting for income
taxes - - - .01 -
------- -------- ------- ------- -------
Earnings $ .73 $ .52 $ .32 $ .36 $ .43
======= ======== ======= ======= =======
Weighted average number of common shares (1)(2) 6,563 6,380 6,236 6,243 5,232
- -------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Cash and cash equivalents $ 55,494 $ 56,603 $49,249 $36,535 $20,503
Total assets 124,350 114,684 87,544 59,378 35,122
Term advances 8,209 16,969 9,732 - -
Indebtedness to money order supplier 48,447 56,645 48,710 34,390 13,811
Senior secured notes payable 20,231 - - - -
Shareholders' equity 31,056 25,236 21,294 19,291 17,028
- -------------------------------------------------------------------------------------------------------------------------
(1) Prior years' earnings per share and weighted average number of common
shares have been restated to reflect the three-for-two stock split
effected by a 50% stock dividend distributed to shareholders of record as
of November 15, 1996.
(2) Includes common shares and common share equivalents, in thousands.
17
SUPPLEMENTAL STATISTICAL DATA
YEAR ENDED JUNE 30,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- --------- -------- ---------
COMPANY-OWNED STORES IN OPERATION:
Beginning of year 544 452 343 276 220
Acquired 46 69 77 32 16
Opened 45 33 40 47 47
Closed (18) (10) (8) (12) (7)
---------- --------- --------- -------- ---------
End of year 617 544 452 343 276
========== ========= ========= ======== =========
Percentage increase in comparable store
revenues from prior year:
Exclusive of tax-related revenues (1) 5.5% 4.1% 2.9% 1.3% 8.4%
Total revenues (2) 6.3% 4.7% 1.6% 1.0% 7.8%
Capital expenditures (in thousands) $ 4,868 $ 3,435 $ 4,187 $4,367 $3,465
Cost of net assets acquired (in $10,766 $14,432 $14,000 $4,846 $ 941
thousands)
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA:
Face amount of checks cashed
(in millions) $ 2,621 $ 2,144 $ 1,567 $1,309 $1,131
Face amount of money orders sold
(in millions) $ 1,812 $ 1,531 $ 1,213 $1,042 $ 872
Face amount of money orders sold as a
percentage of the face amount of checks
cashed 69.1% 71.4% 77.4% 79.6% 77.0%
Face amount of average check $ 291 $ 285 $ 284 $ 286 $ 282
Average fee per check $ 6.78 $ 6.81 $ 6.79 $ 6.94 $ 6.72
Number of checks cashed (in thousands) 9,020 7,535 5,516 4,585 4,007
Number of money orders sold
(in thousands) 13,608 11,835 9,334 8,266 7,233
- ------------------------------------------------------------------------------------------------------------------------------
COLLECTIONS DATA:
Face amount of returned checks (in
thousands) $10,399 $ 8,661 $ 6,206 $5,196 $3,721
Collections (in thousands) 6,554 5,004 3,786 3,304 2,542
---------- ----------- --------- -------- ---------
Net write offs (in thousands) $ 3,845 $ 3,657 $ 2,420 $1,892 $1,179
========== =========== ========= ======== =========
Collections as a percentage of
returned checks 63.0% 57.8% 61.0% 63.6% 68.3%
Net write-offs as a percentage of
revenues 4.4% 5.3% 5.1% 4.7% 3.6%
Net write-offs as a percentage of
the face amount of checks cashed .15% .17% .15% .14% .10%
_____________________
(1) Change in revenues computed excluding electronic tax filing and tax refund
check cashing for the years compared.
(2) Calculated based on the changes in revenues of all stores open for the full
years compared.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE ANALYSIS
- ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
------------------------------------------------------------------------------------------
($ IN THOUSANDS) (PERCENTAGE OF REVENUE)
1997 1996 1995 1997 1996 1995
--------- -------------- ----------- ------------ ------------ -----------
Check fees $54,529 $44,664 $33,008 62.4% 64.8% 69.1%
Tax check fees 8,306 6,663 4,480 9.5 9.7 9.4
Money transfer services 5,749 4,740 1,775 6.6 6.9 3.7
Loan fees and interest 5,703 2,462 597 6.5 3.6 1.2
Money order sales 2,757 2,413 2,089 3.2 3.5 4.4
New customer fees 2,051 1,338 806 2.3 1.9 1.7
Bill payment services 2,197 1,320 819 2.5 1.9 1.7
Franchise revenues 1,398 633 - 1.6 0.9 -
Other fees 4,702 4,726 4,216 5.4 6.8 8.8
--------- --------- --------- --------- ----------- -----------
Total revenue $87,392 $68,959 $47,790 100.0% 100.0% 100.0%
========= ========= ========= ========= =========== ===========
Average revenue per store $150.5 $138.5 $125.1
Fiscal 1997 Compared to Fiscal 1996. Revenues increased $18.4 million, or 27%,
from $69.0 million in the year ended June 30, 1996, to $87.4 million in the year
ended June 30, 1997. This revenue growth resulted from a $3.7 million, or 6.3%,
increase in comparable Company-owned store revenues (421 stores) and a $14.7
million increase from stores which were opened or acquired after June 30, 1995,
and were therefore not open for both of the full periods compared. The number
of Company-owned stores increased by 73, or 13%, from 544 stores open at June
30, 1996, to 617 stores open at June 30, 1997. The increase in total check
cashing fees accounted for 62% of the total revenue increase. Check cashing fees
increased $11.5 million, or 22%, from $51.3 million in fiscal 1996 to $62.8
million in fiscal 1997. This increase resulted from a 20% increase in the total
number of checks cashed.
Money transfer services revenues increased $1.0 million, or 21%, principally
as a result of acquired stores and related revenue guarantees.
Loan fees and interest increased $3.2 million, or 132%, to $5.7 million in
fiscal 1997 as compared to $2.5 million in fiscal 1996. This increase relates
primarily to the increase in the number of stores offering the Company's loan
products to 189 stores in fiscal 1997 as compared to 141 in fiscal 1996. Bill
payment services revenues increased $0.9 million, or 66%, principally as a
result of new contracts with utility companies.
During 1997, the Company sold 34 franchises, acquired 20 former franchises and
opened 26 franchises. Franchise revenues consist of royalties, initial franchise
fees, and buyback fees. Franchise revenues increased $0.8 million from fiscal
1996 to fiscal 1997, because fiscal 1996 includes only five months of revenue,
while fiscal 1997 includes revenues for twelve months.
Fiscal 1996 Compared to Fiscal 1995. Revenues increased $21.2 million, or 44%,
from $47.8 million in the year ended June 30, 1995, to $69.0 million in the year
ended June 30, 1996. This revenue growth resulted from a $2.0 million, or 4.7%,
increase in comparable Company-owned store revenues (326 stores) and a $19.2
million increase from stores which were opened or acquired after June 30, 1994,
and were therefore not open for both of the full periods compared. The number
of Company-owned stores increased by 92, or 20%, from 452 stores open at June
30, 1995, to 544 stores open at June 30, 1996. The increase in total check
cashing fees accounted for 65% of the total revenue increase. Check cashing fees
increased $13.8 million, or 37%, from $37.5 million in fiscal 1995 to $51.3
million in fiscal 1996. This increase resulted from a 37% increase in the total
number of
19
checks cashed, an increase of $2.2 million, or 49%, in tax check fees, and an
increase of 0.3% in the average fee per check.
Money transfer services revenues increased $3.0 million, or 167%, principally
as a result of acquired stores and related revenue guarantees and continued
promotion activities by the money transfer services company. Food stamp
distribution revenues decreased $0.9 million, or 53%, principally as a result of
cancellation of contracts due to the introduction of electronic benefits
transfer. Bill payment services revenues increased $0.5 million, or 61%,
principally as a result of new contracts with utility companies. Franchise
revenues in fiscal 1996 were franchise royalties and fees from the Check Express
and Check-X-Change franchisees, which were earned after the acquisition of Check
Express, Inc. on February 1, 1996.
Loan fees and interest increased 312%, to $2.5 million in fiscal 1996 as
compared to $0.6 million in fiscal 1995. This increase relates primarily to the
increase in the number of stores offering the Company's loan products to 141
stores in fiscal 1996 as compared to 60 in fiscal 1995.
STORE EXPENSE ANALYSIS YEAR ENDED JUNE 30,
- --------------------------------------------------------------------------------------------------------------------------
($ IN THOUSANDS) (PERCENTAGE OF REVENUE)
1997 1996 1995 1997 1996 1995
----------- ----------- ----------- ----------- ----------- -----------
Salaries and benefits $24,844 $20,786 $15,465 28.4% 30.1% 32.4%
Occupancy 13,728 11,284 8,677 15.7 16.4 18.2
Armored and security 3,480 2,926 2,396 4.0 4.2 5.0
Returns and cash shorts 5,961 5,472 3,612 6.8 7.9 7.6
Loan losses 1,183 461 60 1.4 0.7 0.1
Depreciation 3,346 2,752 2,074 3.8 4.0 4.3
Other 6,834 4,871 3,300 7.8 7.1 6.9
----------- ----------- ----------- ----------- ----------- -----------
Total store expense $59,376 $48,552 $35,584 67.9% 70.4% 74.5%
=========== =========== =========== =========== =========== ===========
Average per store expense $102.2 $97.5 $93.2
Fiscal 1997 Compared to Fiscal 1996. Store expenses increased $10.8 million, or
22%, in fiscal 1997 over fiscal 1996, primarily as a result of the increased
number of stores open during the period. Average store expense increased by
approximately $4,700 per store. Store expenses decreased as a percentage of
revenues from 70% in fiscal 1996 to 68% in fiscal 1997, principally as a result
of the increase in average revenues per store. Salaries and benefits expenses,
occupancy costs, and other expense increased 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 9%, in fiscal 1997 as compared to
fiscal 1996, primarily as a result of the additional stores open during the
period. Returned checks, net of collections, and cash shortages decreased as a
percentage of revenues from 7.9% in fiscal 1996 to 6.8% in fiscal 1997. Loan
losses increased $0.7 million in fiscal 1997 over fiscal 1996 and increased
slightly as a percentage of loan fees and interest revenue from 19% in fiscal
1996 to 21% in fiscal 1997.
Fiscal 1996 Compared to Fiscal 1995. Store expenses increased $12.9 million, or
36%, in fiscal 1996 over fiscal 1995, primarily as a result of the larger number
of stores open during the period. Average store expense increased by
approximately $4,300 per store. Store expenses decreased as a percentage of
revenues from 74% in fiscal 1995 to 70% in fiscal 1996, principally as a result
of the increase in average revenues per store. Salaries and benefits expenses,
occupancy costs, and other expense increased primarily as a result of the
increased number of stores in operation. Returned checks, net of collections,
and cash shortages increased $1.9 million, or 51%, in fiscal 1996 as compared to
fiscal 1995, primarily as a result of the additional stores open during the
period and an increase in stolen and forged checks. Returned checks, net of
collections, and cash shortages increased as a percentage of revenues from 7.6%
in fiscal 1995 to 7.9% in fiscal 1996.
20
OTHER EXPENSES ANALYSIS YEAR ENDED JUNE 30,
- ---------------------------------------------------------------------------------------------------------------
($ IN THOUSANDS) (PERCENTAGE OF REVENUE)
1997 1996 1995 1997 1996 1995
------- ------- ------- ---- ------ -------
Region expenses $7,477 $5,647 $4,139 8.6 % 8.2% 8.7 %
Headquarters expenses 6,106 4,744 3,651 7.0 6.9 7.6
Franchise expenses 1,046 458 - 1.2 0.7 -
Other depreciation and amortization 3,024 2,152 1,219 3.5 3.1 2.6
Interest expense, net 2,271 1,714 103 2.6 2.5 0.2
Other expenses 213 236 28 0.2 0.3 0.1
REGION EXPENSES
Fiscal 1997 Compared to Fiscal 1996. Region expenses increased $1.8 million, or
32%, in fiscal 1997 over fiscal 1996. The increase is primarily the result of
increased salaries and benefits during fiscal 1997. In addition, district
supervisors now serve as full-time management, where previously a portion of
their salaries was allocated to their store expense. Region expenses increased
as a percentage of revenues from 8.2% for fiscal 1996 to 8.6% for fiscal 1997.
Fiscal 1996 Compared to Fiscal 1995. Region expenses increased $1.5 million, or
36%, in fiscal 1996 over fiscal 1995. The increase is primarily the result of
increased salaries and benefits for the addition of 28 region personnel in
fiscal 1996. These additional personnel included expansion in the Southeastern
and Southwestern regions and the collections and operations support personnel.
Region expenses decreased as a percentage of revenues from 8.7% for fiscal 1995
to 8.2% for fiscal 1996.
HEADQUARTERS EXPENSES
Fiscal 1997 Compared to Fiscal 1996. Headquarters expenses increased $1.4
million, or 29%, in fiscal 1997 over fiscal 1996. The increase is primarily the
result of increases in headquarters personnel, related salary increases,
management bonuses, and increased rent due to additional floor space for
corporate headquarters. Headquarters expenses as a percentage of revenue
increased slightly from 6.9% in fiscal 1996 to 7.0% in fiscal 1997.
Fiscal 1996 Compared to Fiscal 1995. Headquarters expenses increased $1.1
million, or 30%, in fiscal 1996 over fiscal 1995. The increase is primarily the
result of increases in headquarters personnel, related salary increases and
management bonuses. No corporate management bonuses were paid in fiscal 1995.
Headquarters expenses decreased as a percentage of revenues from 7.6% in fiscal
1995 to 6.9% in fiscal 1996.
FRANCHISE EXPENSES
Franchise expenses relate to the salaries, benefits and other franchisee support
costs for the sales and support personnel in the ACE Franchise Group since the
acquisition of Check Express, Inc. on February 1, 1996. Franchise expenses
increased $0.6 million from fiscal 1996 to fiscal 1997, because fiscal 1996
includes only five months of expenses, while fiscal 1997 includes expenses for
twelve months.
OTHER DEPRECIATION AND AMORTIZATION
Fiscal 1997 Compared to Fiscal 1996. Other depreciation and amortization
increased $0.9 million, or 41%, for fiscal 1997 as compared to fiscal 1996.
This increase was primarily attributable to an increase in amortization of
intangibles (goodwill and non-competition agreements) resulting from the 46
stores acquired during fiscal 1997 and the 69 stores acquired during the last
half of fiscal 1996.
21
Fiscal 1996 Compared to Fiscal 1995. Other depreciation and amortization
increased $0.9 million, or 77%, for fiscal 1996 as compared to fiscal 1995.
This increase was primarily attributable to an increase in amortization of
intangibles (goodwill and non-competition agreements) resulting from the 69
stores acquired during fiscal 1996 and the 38 stores acquired during of the
fourth quarter of fiscal 1995.
INTEREST EXPENSE
Fiscal 1997 Compared to Fiscal 1996. Interest expense, net of interest income,
increased $0.6 million, or 32%, in fiscal 1997 as compared to fiscal 1996. This
increase was primarily attributable to increased borrowings to fund the
acquisition of 46 stores during fiscal 1997.
Fiscal 1996 Compared to Fiscal 1995. Interest expense, net of interest income,
increased $1.6 million, in fiscal 1996 as compared to fiscal 1995. This increase
was primarily attributable to increased borrowings under the Term Advance credit
facility to fund the acquisition of 69 stores during fiscal 1996.
OTHER EXPENSES
Fiscal 1997 Compared to Fiscal 1996. Other expenses remained relatively
unchanged in fiscal 1997 as compared to fiscal 1996.
Fiscal 1996 Compared to Fiscal 1995. Other expenses increased $0.2 million, in
fiscal 1996 as compared to fiscal 1995 as a result of increased store closing
costs in fiscal 1996.
INCOME TAXES
Fiscal 1997 Compared to Fiscal 1996. A total of $3.1 million was provided for
income taxes for fiscal 1997 as compared to $2.1 million in fiscal 1996. The
provisions for income taxes in fiscal 1997 and fiscal 1996 were calculated based
on the statutory federal income tax rate of 34%, plus a provision for state
income taxes and non-deductible goodwill associated with the acquisition of
Check Express, Inc.
Fiscal 1996 Compared to Fiscal 1995. A total of $2.1 million was provided for
income taxes for fiscal 1996 as compared to $1.1 million in fiscal 1995. The
provisions for income taxes in fiscal 1996 and fiscal 1995 were calculated based
on the statutory federal income tax rate of 34%, plus a provision for state
income taxes and (for fiscal 1996 only) non-deductible goodwill associated with
the acquisition of Check Express, Inc.
BALANCE SHEET VARIATIONS
Certain balance sheet accounts of the Company vary as a result of seasonal and
day-to-day requirements resulting from maintaining cash for the cashing of
checks, receipts of cash from the sale of money orders and remittances on money
orders sold. For the year ended June 30, 1997, cash and cash equivalents
decreased $1.1 million, compared to an increase of $7.4 million for the year
ended June 30, 1996.
Accounts and notes receivable increased $2.6 million and net assets held for
sale decreased $3.2 million during the year ended June 30, 1997, principally as
a result of the sale of the Company's automobile loan portfolio. See "Cash
Flows from Investing Activities" below.
Property and equipment and the excess of purchase price over the fair value of
net assets acquired increased $4.5 million and $4.4 million, respectively,
during the year ended June 30, 1997, as a result of the 46 stores acquired and
the 45 stores opened during fiscal 1997, offset by related depreciation and
amortization.
Other assets increased $2.0 million during the year ended June 30, 1997,
principally as a result of a $1.1 million increase in the deferred income tax
benefit and a $0.8 million increase in debt issuance costs.
22
Senior secured notes payable increased by $20.2 million during the year ended
June 30, 1997. See "Cash Flows from Financing Activities" below. Term Advances
from the Money Order Supplier decreased by $8.8 million for the year ended June
30, 1997. This change is comprised of advances of $11.3 million to fund new and
acquired stores, less payments of $20.0 million. See "Liquidity and Capital
Resources" below. Other liabilities increased by $1.4 million during the year
ended June 30, 1997, principally as a result of the deferred income related to
revenue guarantees from the MoneyGram Supplier, less related amortization.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operating Activities
During fiscal 1997, 1996 and 1995, the Company had net cash provided by
operating activities of $9.4 million, $10.4 million, and $6.6 million,
respectively.
During fiscal 1997, 1996 and 1995, the Company recognized $1.5 million, $0.3
million and $0.2 million in deferred revenue, respectively. Under the MoneyGram
Agreement, the Company received an initial bonus of $2 million in June 1996. The
MoneyGram Agreement also provides for incentive bonuses for opening new
locations at which MoneyGram services are offered as well as certain other
performance incentives. The initial bonus and incentive bonuses are recognized
as revenue on a straight-line basis over the five-year term of the MoneyGram
Agreement. The aggregate amount of those additional bonuses and incentives
earned by the Company for the fiscal year ended June 30, 1997, was $1.4 million.
Cash Flows from Investing Activities
During fiscal 1997, 1996 and 1995, the Company used $4.9 million, $3.4 million
and $4.2 million, respectively, for purchases of property and equipment related
principally to new store openings and remodeling existing stores. Capital
expenditures related to acquisitions, including related liabilities incurred,
amounted to $10.8 million, $14.2 million and $12.2 million for the years ended
June 30, 1997, 1996 and 1995, respectively.
The Company's total budgeted capital expenditures, excluding acquisitions, are
currently anticipated to be approximately $4.9 million during its year ending
June 30, 1998, in connection with the opening of 50 to 60 new stores, the
relocation or remodeling of certain existing stores, and computer system
upgrades. The actual amount of capital expenditures will depend in part on the
number of new stores opened, the number of stores acquired and the number of
existing stores that are relocated or remodeled. The Company believes that its
existing resources, together with anticipated cash flow from operations and the
Money Order Supplier's commitment to make Term Advances under the Money Order
Agreement, will be sufficient to finance its planned expansion and operations
during fiscal 1998. Although management anticipates that the Company will
continue to expand, there can be no assurance that the Company's expansion plans
will not be adversely affected by competition, market conditions, or changes in
laws or government regulations affecting check cashing businesses.
During fiscal 1997, the Company sold its automobile loan portfolio in two
transactions for a total of $4.6 million, receiving cash of $2.5 million and
recording a receivable of $2.1 million. The automobile portfolio was a
component of the Check Express acquisition in 1996, and has been classified as
net assets held for sale in the consolidated balance sheets. No gain or loss
was recorded on this transaction.
Cash Flows from Financing Activities
Senior Secured Notes Payable. On December 4, 1996, the Company completed a
private placement for $20 million of 9.03% Senior Secured Notes ("Notes") issued
to Principal Mutual under the Note Purchase Agreement. The principal amount of
these Notes is due in five equal annual installments of $4 million each,
beginning November 15, 1999. Interest payments are due semi-annually, beginning
May 15, 1997. The Notes include various restrictive covenants. The Company is in
compliance with these restrictive covenants. See "Business - Arrangements
Regarding Secured Notes." Net proceeds from the issuance of the Notes were
23
primarily used to pay the then outstanding $18.5 million principal plus accrued
interest on the Term Advances from the Money Order Supplier.
In addition, the Company received $1 million proceeds from the exercise of stock
options during fiscal 1997.
Money Order Supplier
The Money Order Agreement provides a commitment by the Money Order Supplier to
make advances to the Company, in addition to the Term Advances. Those other
advances may generally be used for working capital purposes other than the
payment of operating expenses and capital expenditures. The total amount of
deferred money order remittances payable to the Money Order Supplier and
advances made by the Money Order Supplier under the Money Order Agreement (other
than Term Advances) may not exceed the Company's cash balances and cash
equivalents (including checks cashed by the Company that are being processed for
payment). In addition, the amount of such deferred money order remittances and
such working capital advances are limited based upon the Company's volume of
money order sales. The interest on working capital advances from the Money
Order Supplier is based on a per annum rate of 1.5% over the prime rate. See
"Business - Relationships with the Money Order Supplier and MoneyGram Supplier"
and Note 4 of Notes to Consolidated Financial Statements.
The Money Order Agreement also provides for Term Advances to the Company,
which are related to the Company's expansion and acquisition of new stores. The
maximum amount of Term Advances available to the Company is $18.5 million. Each
Term Advance bears interest at the prime rate plus 1% and is payable in equal
monthly installments utilizing a 60-month amortization until December 31, 1998,
when the remaining principal is due. Term Advances may be prepaid in whole or
in part and reborrowed based on availability. At June 30, 1997, approximately
$10.3 million of the Term Advances commitment was available for acquisitions.
The Money Order Agreement includes various restrictive covenants, including,
among other things, financial coverage ratios, limitations on the incurrence of
indebtedness, operating cash flow minimums and restrictions on permitted capital
expenditures and the payment of dividends. The Company's obligations under the
Money Order Agreement are collateralized by all the assets of the Company. The
Money Order Agreement expires on December 31, 1998, but may be terminated early
under certain circumstances. See "Business - Relationships with the Money Order
Supplier and MoneyGram Supplier" and Note 4 of Notes to Consolidated Financial
Statements.
OPERATING TRENDS
SEASONALITY
The Company's business is seasonal because of the impact of cashing tax refund
checks and two other tax-related services -- electronic tax filing and
processing applications for refund anticipation loans. During fiscal 1995, the
seasonality pattern of the Company's revenues was changed as a result of new
policies by the Internal Revenue Service related to electronic tax filing and
processing of tax returns. Processing and delivery of tax refund checks by the
IRS were delayed an estimated eight weeks in 1995 as compared to fiscal 1994.
For fiscal 1996 and 1997, the pattern of tax revenues followed a more normal
sequence of processing and, consequently, ACE experienced increases in the
number of tax refund checks cashed and an increase in the average tax refund
check.
IMPACT OF INFLATION
Management believes that the Company's results of operations are not dependent
upon the levels of inflation.
24
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," 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 this Report: the Company's relationships
with the Money Order Supplier and the supplier of MoneyGram services;
governmental regulation of the check-cashing industry; 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, and
other financial services entities, as well as retail businesses that offer
products and services offered by the Company; and customer demand and response
to products and services offered by the Company. The Company 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14(a) 1 for information required for this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
25
PART III
The information called for in Part III of this Form 10-K is incorporated by
reference from the Company's definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than
October 28, 1997 (120 days after the Company's fiscal year).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements.
---------------------
Report of independent public accountants.......................................................... 31
Consolidated balance sheets as of June 30, 1997 and 1996.......................................... 32
Consolidated statements of earnings for the years ended June 30, 1997, 1996 and 1995.............. 33
Consolidated statements of shareholders' equity for the years ended June 30, 1997, 1996 and 1995.. 34
Consolidated statements of cash flows for the years ended June 30, 1997, 1996 and 1995............ 35
Notes to consolidated financial statements........................................................ 36
2. Financial Statement Schedules.
-----------------------------
All schedules have been omitted as inapplicable or because the information
required to be included therein is shown in the Financial Statements or Notes to
Consolidated Financial Statements.
3. Exhibits.
---------
Exhibit Number Exhibits
- -------------- --------
3.1 Restated Articles of Incorporation of the Registrant, as amended. (Included
as Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Reg.
No. 33-53286) (the "Registration Statement") and incorporated herein by
reference).
3.2 Amended and Restated Bylaws of the Registrant, as amended. (Included as
Exhibit 3.2 to the Registration Statement and incorporated herein by
reference.)
4.1 Form of Certificate representing shares of Registrant's Common Stock.
(Included as Exhibit 4.1 to the Registration Statement and incorporated
herein by reference.)
10.1 Ace Cash Express, Inc. 1987 Stock Option Plan, as amended (including form
of Incentive Stock Option Agreement). (Included as Exhibit 10.1 to the
Registration Statement and incorporated herein by reference.)
10.2 1992 Master Agreement dated October 14, 1992 (the "Money Order Agreement")
between the Company and American Express Travel Related Services Company,
Inc. (the "Money Order Supplier"). (Confidential treatment for a portion of
this document has been granted by the Securities and Exchange Commission
pursuant to Rule 24b-2
26
under the Securities Exchange Act 1934) (Included as Exhibit 10.4 to the
Registration Statement and incorporated herein by references).
10.3 Agreement Regarding Stock Pledges dated as of November 20, between the
Company and the shareholders pledging shares of Common Stock to secure
the performance of the Company's obligation under the Money Order
Agreement. (Included as Exhibit 10.7 the Registration Statement and
incorporated herein by reference.)
10.4 Lease Agreement dated October 1, 1987, between the Company and Greenway
Tower Joint Venture, as amended by First Amendment to Lease Agreement
dated April 29, 1988, Second Amendment to Lease Agreement dated August
24, 1988, Third Amendment to Lease Agreement dated December 29, 1988 and
Fourth Amendment to Lease Agreement dated January 29, 1991. (Included as
Exhibit 10.8 to the Registration Statement and incorporated herein by
reference.)
10.5 First Amendment to the Money Order Agreement dated December 1,1992,
between the Company and the Money Order Supplier. (Included as Exhibit
10.9 to the Registration Statement and incorporated herein by reference.)
10.6 Agreement for Purchase and Sale of Stock Assets dated January 2, 1992,
between T.J. Martin ("Martin") and R.C. Hemmig ("Hemmig"). (Included as
Exhibit 10.10 to the Registration Statement and incorporated herein by
reference.)
10.7 Option to Repurchase, dated January 2, 1992, in favor of Hemmig.
(Included as Exhibit 10.12 to the Registration Statement and incorporated
herein by reference.)
10.8 Irrevocable Proxy of Martin dated January 2, 1992 in favor of Hemmig.
(Included as Exhibit 10.13 to the Registration Statement and incorporated
by reference herein.)
10.9 Letter Agreement between First Data Corporation and the Company dated
December 6, 1993, amending the First Amendment to the Money Order
Agreement. (Included as Exhibit 10.9 to the Company's Form 10-K as of
June 30, 1994 (Commission File Number 0-20774) and incorporated herein by
reference.)
10.10 Fifth Amendment to Lease Agreement dated June 13, 1994, between the
Company and Greenway Tower Joint Venture. (Included as Exhibit 10.10 to
the Company's Form 10-K as of June 30, 1994 (Commission File Number 0-
20774) and incorporated herein by reference.)
10.11 Asset Purchase Agreement dated November 22, 1993, among the Company, sole
proprietor, limited partnership, and general partnerships that conduct
business under the name "Mr. Money Check Cashers" (the "Sellers"),
general partners of the partnership sellers (the "General Partners"), and
an individual agent for the Sellers and the General Partners (the
"Agent"). (Included as Exhibit 2.1 in the Company's Form 8-K filed on
December 7, 1993 (Commission File Number 0-20774) and incorporated herein
by reference.)
10.12 Food Stamp Sub-Contract Agreement dated November 22, 1993, between the
Company and the Agent. (Included as Exhibit 2.2 to the Company's Form 8-K
filed on December 7,1993 (Commission File Number 0-20774) and
incorporated herein by reference.)
10.13 Ace Cash Express, Inc. 401(k) Profit Sharing Plan, adopted July 1, 1994.
(Included as Exhibit 10.13 to the Company's Form 10-K as of June 30, 1994
(Commission File Number 0-20774) and incorporated herein by reference.)
10.14 Ace Cash Express, Inc. Deferred Compensation Plan, adopted July 1, 1994.
(Included as Exhibit 10.14 to the Company's Form 10-K as of June 30, 1994
(Commission File Number 0-20774) and incorporated herein by reference.)
10.15 Asset Purchase Agreement dated June 27, 1995, among the Company and Quick
Cash, Inc., Q.C. & G. Financial, Inc., David Christenholz and Gloria
Guerra-Leyva. (Included as Exhibit 2.1 to the Company's Form 8-K filed on
July 11, 1995 (Commission File Number 0-20774) and incorporated herein by
reference.)
10.16 Escrow Agreement dated June 27, 1995, among the Company, Quick Cash,
Inc., Q.C. & G. Financial, Inc., David Christenholz, Gloria Guerra-Leyva,
and Bank One, Arizona, NA, as escrow agent. (Included as Exhibit 2.2 to
the
27
Company's Form 8-K filed July 11, 1995 (Commission File Number 0-20774)
and incorporated herein by reference.)
10.17 Promissory Note dated June 27, 1995, of the Registrant in favor of the
Money Order Supplier. (Included as Exhibit 2.3 to Form 8-K filed July 11,
1995 and incorporated herein by reference.)
10.18 Second Amendment to the Money Order Agreement dated September 8, 1995,
between the Company and the Money Order Supplier. (Included as Exhibit
10.18 to the Company's Form 10-K as of June 30, 1995 (Commission File
Number 0-20774) and incorporated herein by reference.)
10.19 Ace Cash Express, Inc. Non-Employee Directors Stock Option Plan dated
March 27, 1995. (Included as Exhibit 10.19 to the Company's Form 10-K as
June 30, 1995 (Commission File Number 0-20774) and incorporated herein by
reference.)
10.20 Letter Agreement dated July 13, 1995, between First Data Corporation and
the Company amending the Money Order Agreement. (Included as Exhibit
10.20 to the Company's Form 10-K as of June 30, 1995 (Commission File
Number 0-20774) and incorporated herein by reference.)
10.21 Letter Agreement dated February 1, 1996, between the Company and the
Money Order Supplier amending the Money Order Agreement. (Included as
Exhibit 10.21 to the Company's Form 10-Q as of December 31, 1995
(Commission File Number 0-20774) and incorporated herein by reference.)
10.22 1996 MoneyGram Master Agreement dated February 1, 1996, between the
Company and the Money Order Supplier (the "MoneyGram Agreement").
(Included as Exhibit 10.22 to the Company's Form 10-Q as of December 31,
1995 (Commission File Number 0-20774) and incorporated herein by
reference.)
10.23 Agreement and Plan of Merger dated October 13, 1995, among the Company,
Check Express, Inc., and Ace Acquisition Corporation. (Included as
Exhibit 2.1 to the Company's Form 8-K filed on February 16,1996
(Commission File Number 0-20774) and incorporated herein by reference.)
10.24 Amendment (to Agreement and Plan of Merger) dated December 20, 1995,
among the Company, Check Express, Inc., and Ace Acquisition Corporation.
(Included as Exhibit 2.2 to the Company's Form 8-K filed on February 16,
1996 (Commission File Number 0-20774) and incorporated herein by
reference.)
10.25 Sixth Amendment to Lease Agreement dated February 1, 1996, between the
Company and Greenway Tower Joint Venture. (Included as Exhibit 10.25 to
the Company's Form 10-Q as of March 31, 1996 (Commission File Number 0-
20774) and incorporated herein by reference.)
10.26 1996-A Amendment to the MoneyGram Agreement dated March 21, 1996, between
the Company and the Money Order Supplier. (Included as Exhibit 10.26 to
the Company's Form 10-K as of June 30, 1996 (Commission File Number 0-
20774) and incorporated herein by reference.)
10.27 1996-B Amendment to the MoneyGram Agreement dated June 27, 1996, between
the Company and the Money Order Supplier. (Included as Exhibit 10.27 to
the Company's Form 10-K as of June 30, 1996 (Commission file Number 0-
20774) and incorporated herein by reference.)
10.28 Note Purchase Agreement dated November 15, 1996, between the Company and
Principal Mutual Life Insurance Company. (Included as Exhibit 10.28 to
the Company's Form 10-Q as of December 31, 1996 (Commission File Number
0-20774) and incorporated herein by reference.)
10.29 Form of 9.03% Senior Secured Notes due November 15, 2003. (Included as
Exhibit 10.29 to the Company's Form 10-Q as of December 31, 1996
(Commission File Number 0-20774) and incorporated herein by reference.)
10.30 Collateral Trust Agreement dated November 15, 1996, among the Company and
the Money Order Supplier, Principal Mutual Life Insurance Company, and
Wilmington Trust Company. (Included as Exhibit 10.30 to the Company's
Form 10-Q as of December 31, 1996 (Commission File Number 0-20774) and
incorporated herein by reference.)
28
10.31 Assignment of Deposit Accounts and Security Agreement dated November 15,
1996, between the Company and Wilmington Trust Company. (Included as
Exhibit 10.31 to the Company's Form 10-Q as of December 31, 1996
(Commission File Number 0-20774) and incorporated herein by reference.)
10.32 Third Amendment to the Money Order Agreement dated November 15, 1996,
between the Company and the Money Order Supplier. (Included as Exhibit
10.32 to the Company's Form 10-Q as of December 31, 1996 (Commission File
Number 0-20774) and incorporated herein by reference.)
27 Financial Data Schedule
(b) Reports on Form 8-K
None
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ JAY B.SHIPOWITZ
------------------------------
Jay B. Shipowitz
Senior Vice President
Chief Financial Officer, Treasurer and Secretary
Date: September 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ RAYMOND C. HEMMIG Chairman of the Board, Director
- ---------------------
Raymond C. Hemmig
/s/ DONALD H. NEUSTADT President and Chief Executive Officer
- ----------------------
Donald H. Neustadt Director (Principal Executive Officer)
/s/ JAY B. SHIPOWITZ Senior Vice President, Chief Financial Officer,
- -------------------- Treasurer and Secretary (Principal Financial and
Jay B. Shipowitz Accounting Officer)
/s/ HOWARD W. DAVIS Director
- -------------------
Howard W. Davis
/s/ MARSHALL B. PAYNE Director
- ---------------------
Marshall B. Payne
/s/ EDWARD W. ROSE III Director
- ----------------------
Edward W. Rose III
/s/ CHARLES DANIEL YOST Director
- -----------------------
Charles Daniel Yost
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Ace Cash Express, Inc.:
We have audited the accompanying consolidated balance sheets of Ace Cash
Express, Inc. (a Texas corporation) and subsidiaries as of June 30, 1997 and
1996, and the related consolidated statements of earnings, shareholders' equity
and cash flows for each of the three years in the period ended June 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ace Cash Express, Inc. and
subsidiaries as of June 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Dallas, Texas,
August 15, 1997
31
ACE CASH EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30,
------------------------------------------
1997 1996
-------------------- -----------------
($ in thousands)
Cash and cash equivalents $ 55,494 $ 56,603
Accounts and notes receivable, net of allowance of
$956,000 and $138,000, respectively 7,459 4,891
Prepaid expenses 573 328
Inventories 2,052 2,084
Property and equipment, net 23,920 19,469
Covenants not to compete, net 2,775 2,372
Excess of purchase price over fair value of assets acquired, net 27,505 23,124
Other assets 4,572 2,616
Net assets held for sale - 3,197
-------------- --------------
$ 124,350 $ 114,684
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Money order principal payable $ 41,281 $ 35,488
Senior secured notes payable 20,231 -
Revolving advances from money order supplier 7,166 21,157
Accounts payable and accrued liabilities 11,031 10,168
Notes payable 637 2,320
Term advances from money order supplier 8,209 16,969
Other liabilities 4,739 3,346
Commitments and contingencies
Shareholders' equity:
Preferred stock, $1 par value, 1,000,000 shares authorized,
none issued and outstanding - -
Common stock, $.01 par value, 10,000,000 shares
authorized, 6,445,741 and 6,324,306 shares issued and
outstanding, respectively 64 63
Additional paid-in capital 19,162 18,109
Retained earnings 11,830 7,064
-------------- --------------
Total shareholders' equity 31,056 25,236
-------------- --------------
$ 124,350 $ 114,684
-------------- --------------
The accompanying notes are an integral part of these consolidated financial
statements.
32
ACE CASH EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED JUNE 30,
----------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ ------------------------
(in thousands, except per share amounts)
Revenues $ 87,392 $ 68,959 $ 47,790
Store expenses:
Salaries and benefits 24,844 20,786 15,465
Occupancy 13,728 11,284 8,677
Depreciation 3,346 2,752 2,074
Other 17,458 13,730 9,368
--------------- --------------- ---------------
Total store expenses 59,376 48,552 35,584
--------------- --------------- ---------------
Store gross margin 28,016 20,407 12,206
Region expenses 7,477 5,647 4,139
Headquarters expenses 6,106 4,744 3,651
Franchise expenses 1,046 458 --
Other depreciation and amortization 3,024 2,152 1,219
Interest expense, net 2,271 1,714 103
Other expenses 213 236 28
--------------- --------------- ---------------
Income before income taxes 7,879 5,456 3,066
Income taxes 3,113 2,130 1,076
--------------- --------------- ---------------
Net income $ 4,766 $ 3,326 $ 1,990
=============== =============== ===============
Earnings per share $ .73 $ .52 $ .32
=============== =============== ===============
Weighted average number of common and
common equivalent shares outstanding 6,563 6,380 6,236
=============== =============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
33
ACE CASH EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($ IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL
------------------------------------------ PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
-------------------- ----------------- ---------------- ---------------- ----------------
BALANCE, JUNE 30, 1994 6,191,949 $ 62 $ 17,481 $ 1,748 $ 19,291
Stock options exercised 13,425 - 12 - 12
Net income - - - 1,990 1,990
-------------------- ----------------- ---------------- ---------------- ----------------
BALANCE, JUNE 30, 1995 6,205,374 62 17,493 3,738 21,293
Stock options exercised 118,932 1 616 - 617
Net income - - - 3,326 3,326
-------------------- ----------------- ---------------- ---------------- ----------------
BALANCE, JUNE 30, 1996 6,324,306 63 18,109 7,064 25,236
Stock options exercised 121,435 1 1,053 - 1,054
Net income - - - 4,766 4,766
-------------------- ----------------- ---------------- ---------------- ----------------
BALANCE, JUNE 30, 1997 6,445,741 $ 64 $ 19,162 $ 11,830 $ 31,056
==================== ================= ================ ================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
34
ACE CASH EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
-------------------------------------
1997 1996 1995
---------- ---------- ---------
($ in thousands)
Cash flows from operating activities:
Net income $ 4,766 $ 3,326 $ 1,990
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 6,399 4,908 3,293
Change in deferred taxes (435) (995) 232
Recognition of deferred revenue (1,478) (278) (178)
Changes in assets and liabilities:
Accounts and notes receivable, net (1,861) (1,541) (148)
Prepaid expenses (245) 14 (31)
Inventories 32 (451) (125)
Other assets (1,521) (1,262) (346)
Accounts payable and other liabilities 3,734 6,690 1,912
---------- ---------- ---------
Net cash provided by operating activities 9,391 10,411 6,599
Cash flows from investing activities:
Purchases of property and equipment, net (4,868) (3,435) (4,187)
Cost of net assets acquired (10,766) (14,219) (12,239)
Proceeds from sale of net assets held for sale 2,490 - -
---------- ---------- ---------
Net cash used by investing activities (13,144) (17,654) (16,426)
Cash flows from financing activities:
Net proceeds from issuance of senior secured notes payable 20,231 - -
Net (repayments) borrowings from money order supplier (8,198) 7,935 14,321
Term advances from money order supplier 11,273 8,768 9,732
Net payments on notes payable (1,683) (1,192) (1,525)
Payment of term advances from money order supplier (20,033) (1,531) --
Proceeds from stock options exercised 1,054 617 13
---------- ---------- ---------
Net cash provided by financing activities 2,644 14,597 22,541
---------- ---------- ---------
Net (decrease) increase in cash and cash equivalents (1,109) 7,354 12,714
Cash and cash equivalents, beginning of year 56,603 49,249 36,535
---------- ---------- ---------
Cash and cash equivalents, end of year $ 55,494 $ 56,603 $ 49,249
========== ========== =========
Supplemental disclosures of cash flows information:
Cash paid for:
Interest $ 1,330 $ 1,646 $ 64
Income taxes 4,864 1,798 572
Supplemental schedule of non-cash investing activities:
Liabilities incurred in connection with acquired stores $ 1,149 $ 213 $ 1,761
The accompanying notes are an integral part of these consolidated financial
statements.
35
ACE CASH EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
Ace Cash Express, Inc. (the "Company") was incorporated under the laws of the
state of Texas in March 1982. The Company operates in one business segment and
provides retail financial services, such as check cashing, money order, wire
transfer and other transactional services to customers for a fee. On June 30,
1997, the Company owned and operated 617 stores in 19 states and the District of
Columbia. In addition, the Company has 73 franchised stores.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses. Actual results could differ from
those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid investment securities purchased with an original maturity of three months
or less to be cash equivalents.
Accounts Receivable
Accounts and notes receivable on the consolidated balance sheet includes a
receivable for the Company's post-dated check product. Through this product,
the Company permits a customer to receive a cash advance for a fee, secured by a
post-dated personal check. This product generally has a term of two to four
weeks. As of June 30, 1997 and 1996, the receivable for post dated checks was
$2.8 million and $1.5 million, respectively.
Inventories
Inventories consist of unsold lottery tickets, supplies and other inventory.
Lottery tickets are stated at purchase price and accounted for using the
specific identification method. Supplies and other inventories are stated at
cost and utilize the first-in, first-out method. No provision for obsolescence
is considered necessary.
JUNE 30,
-------------------------------------
1997 1996
--------------- ---------------
( $ in thousands)
Lottery tickets inventory $ 1,799 $ 1,730
Supplies - 65
Other inventory 253 289
--------------- ---------------
$ 2,052 $ 2,084
=============== ===============
36
Property and Equipment
Depreciation and amortization of property and equipment is based on the lesser
of the estimated useful lives of the respective assets or lease terms, including
anticipated renewals. The useful lives of property and equipment by class are as
follows: store equipment, furniture and fixtures, four to 10 years; leasehold
improvements, the lesser of 10 years or the term of the lease; signs, eight
years; and other property and equipment, five to 10 years. Depreciation is
calculated on a straight-line basis.
Intangible Assets
Pre-opening expenses, consisting of salary, training and travel costs incurred
prior to store opening, are deferred and amortized over 12 months. Pre-opening
costs (net of accumulated amortization) of $248,000 and $162,000 at June 30,
1997 and 1996, respectively, are included in other assets.
The excess of the purchase price over fair value of net assets acquired is being
amortized on the straight-line method over 30 years. Covenants not to compete
are amortized over the applicable period of the contract, generally ranging from
two to five years. Company management annually evaluates the useful lives of
intangible assets, their carrying values and their expected benefits in relation
to the results of operations. The unamortized cost of impaired intangible
assets is charged to expense when impairment occurs.
Store Expenses
The direct costs incurred in operating the stores have been classified as store
expenses and are deducted from total revenues to determine contribution
attributable to the stores. Store expenses include salary and benefit expense
of store employees, rent and other occupancy costs, depreciation and
amortization of store property and pre-opening costs, bank charges, armored and
security costs, net returned checks, cash shortages and other costs incurred by
the stores.
Franchise Accounting
The Company includes franchise fees in revenues. Franchise fees include initial,
territory, and future optional store fees, as well as continuing franchise fees
("royalty fees") and research and development fees. The Company offers both
nonexclusive and exclusive franchise arrangements.
Initial fees are recognized when the Company has provided substantially all its
initial services in accordance with the franchise agreements. Generally, this
occurs when the related sites have been approved or identified and the
franchisee has completed the training required by the Company. Related direct
costs, primarily sales commissions, are deferred until revenue is recognized.
Royalty fees are recognized as revenues as they are earned under the franchise
agreements. For the years ended June 30, 1997 and 1996, approximately $1,398,000
and $633,000, respectively, of franchise revenue was recognized.
Cash payments received under franchise agreements prior to the completion of the
earnings process are deferred until all initial services are performed.
Income Taxes
The Company has implemented the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." SFAS No. 109 utilizes
an asset and liability approach, and deferred taxes are determined based on the
estimated future tax effects of differences between the financial statement and
tax bases of assets and liabilities given the provisions of the enacted tax
laws.
37
In accordance with the provisions of SFAS No. 109, a valuation allowance should
be recognized, if it is more likely than not that some portion or all of a
deferred tax asset will not be realized. The Company recorded no valuation
allowance as of June 30, 1997 or 1996.
Earnings Per Share
Earnings per share have been computed based on the weighted average number of
common and common equivalent shares outstanding for the respective periods.
Employee stock options and other common stock equivalents have been included as
common stock equivalents unless anti-dilutive.
Returned Checks
The Company charges operations for potential losses on returned checks in the
period such checks are returned, since ultimate collection of these items is
uncertain. Recoveries on returned checks are credited in the period when the
recovery is received.
Software Development Costs
All internal costs of computer software development related to the Company's
point-of-sale system are expensed as incurred.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
2. PROPERTY AND EQUIPMENT
JUNE 30,
--------------------------------------
1997 1996
---------------- ----------------
($ in thousands)
Property and equipment, at cost:
Store equipment, furniture and fixtures $ 20,674 $ 15,385
Leasehold improvements 14,263 12,113
Signs 4,242 3,497
Other 911 799
---------------- ----------------
40,090 31,794
Less -- accumulated depreciation and amortization (16,170) (12,325)
---------------- ----------------
$ 23,920 $ 19,469
================ ================
38
3. ACQUISITIONS AND DISPOSITIONS
During the year ended June 30, 1997, the Company acquired the assets of 46
stores in 20 separate purchases from third parties for approximately $10.8
million. During the year ended June 30, 1996, the Company acquired the assets of
70 stores, including all the outstanding common stock of Check Express, Inc., in
twelve separate purchases from third parties for approximately $14.2 million.
During the year ended June 30, 1995, the Company acquired the assets of 77
stores in eleven separate transactions from third parties for approximately
$12.2 million. The unaudited pro forma results of operations of the combined
entities as if all acquisitions had occurred at the beginning of each fiscal
year is presented as follows (in thousands, except for per-share data):
JUNE 30,
-------------------------------------------
1997 1996
------------------- -------------------
Revenues $ 89,967 $ 73,206
Net income 5,046 3,581
Earnings per share:
Net income $ .77 $ .56
Weighted average shares outstanding 6,563 6,380
As a condition of each purchase, the sellers agreed not to compete with the
Company for specified periods ranging from two to five years. All acquisitions
have been accounted for using the purchase method of accounting. Covenants not
to compete were valued at contractually agreed upon amounts which management
believes correspond to fair value.
JUNE 30,
----------------------------------------
1997 1996
----------------- -----------------
($ IN THOUSANDS)
Covenants not to compete, at cost $ 5,095 $ 3,812
Less -- accumulated amortization (2,320) (1,440)
----------------- -----------------
$ 2,775 $ 2,372
================= =================
The excess purchase price over fair value of net assets acquired is as follows:
JUNE 30,
--------------------------------------
1997 1996
---------------- ----------------
($ IN THOUSANDS)
Excess of purchase price over fair value of net assets $ 29,570 $ 24,566
Less -- accumulated amortization (2,065) (1,442)
---------------- ----------------
$ 27,505 $ 23,124
================ ================
As of March 31, 1997, the Company sold a portion of its automobile loan
portfolio for $3.3 million, receiving cash of $2.5 million and recording a
receivable of $0.8 million. As collection of the receivable is based on the
terms of a buy back agreement with the buyer, a reserve of $0.5 million was
established for certain estimated uncollectible accounts. The automobile loan
portfolio was a component of the Check Express acquisition in 1996, and has been
classified as net assets held for sale in the consolidated balance sheets.
Since it has been the Company's intent to divest itself of this business
segment, the loss from this sale of approximately $0.5 million has been treated
as an adjustment of the original purchase price allocation and an increase to
goodwill and therefore, has no impact on the accompanying statement of
operations. During the fourth quarter of fiscal 1997, the remaining portion of
the automobile loan portfolio was sold in exchange for a receivable of $1.3
million. No gain or loss was recorded on this transaction.
39
4. FINANCING ARRANGEMENTS AND GUARANTEES
Senior Secured Notes Payable
On December 4, 1996, the Company completed a private placement for $20 million
of 9.03% Senior Secured Notes ("Notes") issued to Principal Mutual Life
Insurance Company under the Note Purchase Agreement. The principal amount of
the Notes is due in five equal annual installments of $4 million each, beginning
November 15, 1999. Interest payments are due semiannually, beginning May 15,
1997. The Notes include various restrictive covenants, similar to those
included in the Money Order Agreement. The Company is in compliance with these
restrictive covenants. Net proceeds from the issuance of the Notes were
primarily used to pay the then outstanding $18.5 million principal plus accrued
interest on the Term Advances from the Money Order Supplier.
The Notes are secured by a security interest in substantially all the assets of
the Company. The Company also entered into a Collateral Trust Agreement with
Wilmington Trust Company, as trustee, and the Company's two secured lenders,
Principal Mutual Life Insurance Company and the Money Order Supplier. Under the
terms of the Collateral Trust Agreement, the Money Order Supplier has priority
with respect to deferred money order remittances, and all secured lenders
otherwise share in the collateral on a pro rata basis, in the event of
foreclosure or liquidation of the collateral. The Company also executed an
Assignment of Deposit Accounts and Security Agreement with Wilmington Trust
Company, to grant the trustee a security interest in the same collateral that
had previously secured the Company's obligations solely to the Money Order
Supplier.
Money Order Supplier
Most of the Company's funds for the operation of its check cashing business,
ACE's primary business, are derived from IPS, Inc. (the "Money Order Supplier")
under the terms of the Company's 1992 Master Agreement as amended (the "Money
Order Agreement"). The Money Order Agreement provides for the payment of
certain fees to the Money Order Supplier in connection with the sales of money
orders by the Company and requires the Company to remit proceeds from money
order sales to the Money Order Supplier in accordance with a deferred remittance
schedule. In addition, the Money Order Agreement provides a commitment by the
Money Order Supplier to make advances, including working capital advances
("Revolver Advance") and long-term revolving advances ("Term Advances") to the
Company. Term Advances are intended to fund a portion of the Company's
financial needs for expansion and acquisition of new stores.
The Money Order Agreement provides for scheduled remittances of proceeds from
the sale of money orders. The Money Order Agreement requires the Company to use
money order proceeds in accordance with applicable law. The Company uses the
money order proceeds for making change in the ordinary course of its business,
including when cashing checks and may use Revolver Advances under the Money
Order Agreement for working capital purposes other than the payment of operating
expenses and capital expenditures.
The total amount of deferred money order remittances payable to the Money Order
Supplier and Revolver Advances made by the Money Order Supplier under the Money
Order Agreement may not exceed the Company's cash balances and cash equivalents
(including checks cashed by the Company that are being processed for payment).
In addition, the amount of such deferred money order remittances and Revolver
Advances is limited based upon the Company's volume of money order sales. The
interest on Revolver Advances from the Money Order Supplier is based on a per
annum rate of 1.5% over the prime rate. All the assets of the Company
collateralize the Company's obligations under the Money Order Agreement.
The Money Order Agreement includes various restrictive covenants, including,
among other things, financial coverage ratios and limitations on the Company's
incurrence of indebtedness, required operating cash flow levels and permitted
capital expenditures. The Money Order Agreement also restricts encumbrance of
the collateral provided to the Money Order Supplier, repurchases of its capital
stock, effecting fundamental changes to its governing corporate documents and
making investments in other persons or entities. Under the Money Order
Agreement, the Company's ability to pay dividends is limited to the greater of
(i) 20% of the earnings of the
40
Company for the immediately preceding fiscal year and (ii) after December 1,
1994, 10% of the cumulative earnings of the Company after September 30, 1992, up
to $1.0 million annually; provided that the payment of any dividends does not
cause a default under any other covenant in the Money Order Agreement.
The Money Order Agreement also provides for Term Advances to the Company, which
are related to the Company's expansion and acquisition of new stores. The
maximum amount of Term Advances available to the Company is $18.5 million. Each
Term Advance bears interest at the prime rate plus 1% and is payable in equal
monthly installments utilizing a 60-month amortization until December 31, 1998,
when the remaining principal is due. Term Advances may be prepaid in whole or
in part and reborrowed based on availability. At June 30, 1997, approximately
$10.3 million of the Term Advances commitment is available for acquisitions.
In addition, the Company and the Money Order Supplier entered into the Third
Amendment to the Money Order Agreement, under which the Money Order Supplier
agreed to continue to make the Term Advance facility available to the company on
substantially the same terms existing prior to the issuance of these notes.
After repayment of the $18.5 million outstanding Term Advances, the Company
obtained Term Advances from the Money Order Supplier of approximately $8.2
million as of June 30, 1997, which were used to fund fiscal 1997 acquisitions.
Principal payments of $316,000 are due monthly through December 31, 1998, when
the remaining principal of approximately $2,521,000 is due. Interest at 1% over
the prime interest rate (totaling 9.5% at August 15, 1997) is due monthly.
The Money Order Agreement expires on December 31, 1998, but may be terminated by
the Money Order Supplier before that date for several reasons, including (i)
upon a change of control of the Company, (ii) after a default by the Company
that is not cured, (iii) under certain limited circumstances after 180 days'
notice, or (iv) upon a reasonable determination by the Money Order Supplier that
there has been a material adverse change in the financial condition of the
Company.
Notes Payable
JUNE 30,
----------------------------------------
1997 1996
------------------ -----------------
($ IN THOUSANDS)
Notes payable for acquired stores at interest rate of
prime plus 1%, currently 9.5%, due in fiscal 1998 $ 637 $ 203
Notes payable to banks, paid in fiscal 1997 - 1,228
Subordinated notes payable:
Promissory notes payable, subordinate to all senior
indebtedness at interest rates ranging from 6% to
14%, due in monthly principal and interest
installments through fiscal 1999, paid in fiscal
1997 - 779
Other - 110
------------------ -----------------
$ 637 $ 2,320
================== =================
The Company believes the fair value of the senior secured notes payable and
other notes payable do not materially differ from their carrying value.
41
Debt Maturity Schedule
Scheduled maturities of debt for the years following June 30, 1997, including
the senior secured notes payable, term advances from the Money Order Supplier,
and notes payable, are as follows (in thousands of dollars):
Year ending June 30:
1998....................................... $ 2,632
1999....................................... 6,445
2000....................................... 4,000
2001....................................... 4,000
2002 and thereafter........................ 12,000
------
$29,077
======
MoneyGram Guarantees and Incentive Bonuses
On December 11, 1996, First Data Corporation ("FDC") divested itself of
MoneyGram Corporation. However, the Company continues to operate under the 1996
MoneyGram Master Agreement which provides for a revenue guarantee on acquired
stores for the conversion of wire transfer services to MoneyGram from another
supplier. The amount of the guarantee is equivalent to the annual aggregate
wire transfer revenue for the acquired stores derived from another supplier.
The guarantee period expires on December 31, 2000, unless the Master Agreement
is extended. The amount of guarantee revenue recognized for the fiscal years
ended June 30, 1997 and 1996, was $924,000 and $464,000, respectively.
Since its execution, the 1996 MoneyGram Master Agreement has been amended (as so
amended, the "MoneyGram Agreement") in certain respects. The term of the
MoneyGram Agreement has been extended for two additional years, to December 31,
2000. Under terms of the agreement, MoneyGram paid the company an initial bonus
of $2 million. The agreement also provides for future incentives for opening
new MoneyGram service locations. The bonuses have been deferred and included in
other liabilities in the Company's consolidated balance sheet and are amortized
to revenues on a straight-line basis over a five-year term. During the year
ended June 30, 1997, $1.4 million of amortization was recorded and included in
money transfer services revenues. The deferred revenue balance at June 30,
1997, was $3.7 million for MoneyGram bonuses and incentives.
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
JUNE 30,
---------------------------------------
1997 1996
----------------- -----------------
($ IN THOUSANDS)
Accounts payable -- trade $ 3,290 $ 3,578
Accrued salaries 3,192 2,248
Money transfer payable 1,319 1,194
Accrued bank charges 330 522
Income taxes payable 759 1,276
Other 2,141 1,350
----------------- -----------------
$ 11,031 $ 10,168
================= =================
42
6. OTHER LIABILITIES
JUNE 30,
---------------------------------------
1997 1996
----------------- -----------------
($ IN THOUSANDS)
Deferred revenue $3,913 $3,033
Unearned franchise fees 643 243
Other 183 70
----------------- -----------------
$4,739 $3,346
================= =================
7. SHAREHOLDERS' EQUITY
The Company sponsors a Stock Option Plan (as amended, the "Plan") for eligible
employees. There are 791,783 shares of Common Stock reserved for grants of
options under the Plan. Options are granted at the sole discretion of the Stock
Option Committee of the Board of Directors to selected employees of the Company.
Outstanding options are generally exercisable annually in installments over a
three-year period from the date of grant at an exercise price of not less than
the fair market value at the grant date. The options expire five years after
date of grant.
On October 29, 1996, the Board of Directors of the Company authorized a stock
dividend in the form of a three-for-two stock split. The split was effected by
distributing one additional share of common stock of the Company for every two
shares of common stock outstanding. Cash was paid in lieu of fractional shares.
All share and per share amounts in the financial statements have been restated
to reflect the stock split.
In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which requires entities to
measure compensation cost related to awards of stock-based compensation using
either the fair value method or the intrinsic value method. Under the fair value
method, compensation expense is measured at the grant date based on the fair
value of the award. Under the intrinsic value method, compensation expense is
equal to the excess, if any, of the quoted market price of the stock at the
grant date over the amount the employee must pay to acquire the stock. Entities
electing to measure compensation costs using the intrinsic value must make pro
forma disclosures for fiscal years beginning after January 1, 1996, of net
income and earnings per share as if the fair value method had been applied. The
Company has elected to account for stock-based compensation programs using the
intrinsic value method consistent with its existing accounting policies.
Therefore, the standard has no effect on the consolidated financial statements.
The Company has elected to continue to apply the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and, accordingly, stock options do not represent compensation expense in the
determination of net income in the Consolidated Statements of Earnings. Had
stock option compensation expense been determined consistent with the fair value
method of measuring compensation expense under SFAS No. 123, the pro forma
effect for fiscal 1997 and 1996 would have been a reduction in the Company's net
income of approximately $683,000 and $762,000, respectively, and a reduction in
the earnings per share of approximately $.10 and $.12, respectively.
In determining the pro forma stock compensation expense, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions used for grants in
fiscal 1997 and 1996, respectively: expected volatility of 43%; risk-free
interest rate of 5.25%; expected lives of 2.5 years; and no expected dividends.
Stock options outstanding at June 30, 1997, had a range in exercise prices of
$5.00 to $12.50 and an average remaining contractual life of 3.2 years. The
fair value of options granted during the years ended June 30, 1997 and 1996,
calculated using the Black-Scholes option-pricing model, was approximately $4.83
per share and $7.10 per share, respectively.
43
The following table summarizes stock option activity under the Plan:
Available for Weighted
------------- --------
Reserved Granted Grant Average Price
-------- ------- ----- -------------
Shares at June 30, 1994 445,575 425,934 19,641 $ 6.06
Increase in shares reserved for options 300,000 - 300,000 -
Exercised (13,425) (13,425) - 1.19
Canceled - (35,700) 35,700 7.67
Granted - 126,075 (126,075) 5.36
--------------------------------------------------------
Shares at June 30, 1995 732,150 502,884 229,266 5.90
Exercised (118,932) (118,932) - 4.47
Canceled - (88,337) 88,337 6.01
Granted - 170,175 (170,175) 6.05
--------------------------------------------------------
Shares at June 30, 1996 613,218 465,790 147,428 6.20
Increase in shares reserved for options 300,000 - 300,000 -
Exercised (121,435) (121,435) - 6.95
Canceled - (67,048) 67,048 5.44
Granted - 233,535 (233,535) 10.42
--------------------------------------------------------
Shares at June 30, 1997 791,783 510,842 280,941 $ 8.05
========================================================
At June 30, 1997, the outstanding options as to 510,842 shares have exercise
prices ranging from $5.00 to $12.50 (fair market value on dates of grant).
Options as to 196,786 shares are exercisable at a weighted average exercise
price of $ 6.26 per share.
In March 1995, the Board of Directors approved the adoption of a nonqualified
non-employee director stock option plan. The purpose of this plan is to permit
the Company to grant options to the Company's outside directors as part of their
compensation. The plan has 90,000 shares reserved for issuance. Options as to
51,000 shares have been granted under the plan at a weighted average exercise
price of $7.93 a share. None were exercised or canceled. A total of 13,500
shares are exercisable at June 30, 1997.
44
8. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------------
1997 1996 1995
------------------------ ----------------------- ------------------------
($ in thousands)
Current:
Federal income tax $2,922 $2,638 $ 669
State income tax 626 488 175
------------------------ ----------------------- ------------------------
3,548 3,126 844
Deferred (435) (996) 232
------------------------ ----------------------- ------------------------
$3,113 $2,130 $1,076
======================== ======================= ========================
The net deferred tax asset consists of the following:
JUNE 30,
-------------------------------------------------------
1997 1996
------------------------ -------------------------
($ in thousands)
Gross assets $2,866 $1,577
Gross liabilities (912) (723)
------------------------ -------------------------
Net deferred tax asset $1,954 $ 854
======================== =========================
The tax effect of significant temporary differences representing deferred tax
assets and liabilities are as follows:
JUNE 30,
--------------------------------------------------------
1997 1996
------------------------ --------------------------
($ in thousands)
Accrued liabilities and other $ 719 $ 327
Deferred revenue 1,526 1,182
Depreciation and amortization (291) (655)
------------------------ --------------------------
$1,954 $ 854
======================== ==========================
The provisions for taxes on income as reported differ from the tax provision
computed by applying the statutory federal income tax rate of 34% as follows:
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
($ in thousands)
Federal income tax provision on income at
statutory rate of 34% $2,679 $1,855 $1,042
State taxes, net of federal benefit 413 239 127
Targeted jobs tax credit, net - - (33)
Amortization of excess purchase price over
fair value of assets acquired 81 31 16
Tax-exempt interest - - (10)
Reduction in prior years' taxes - - (56)
Other-net (60) 5 (10)
---------------------- ---------------------- ----------------------
Income tax provision $3,113 $2,130 $1,076
====================== ====================== ======================
45
9. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under non-cancelable
operating leases. Most of the Company's facility leases contain options that
allow the Company to renew leases for periods that generally range from three to
nine years. At June 30, 1997, future minimum rental payments under existing
leases were as follows (in thousands of dollars):
Year ending June 30:
1998............................................ $10,448
1999............................................ 8,127
2000............................................ 4,238
2001............................................ 1,148
2002............................................ 514
-------
$24,475
=======
Rent expense was approximately $9,608,000, $7,773,000, and $5,929,000 for the
years ended June 30, 1997, 1996 and 1995, respectively.
The Company is involved in various legal proceedings incidental to the conduct
of its business. Management believes that none of these legal proceedings will
result in any material impact on the Company's financial condition and results
of operations.
10. EARNINGS PER SHARE
The FASB has issued SFAS No. 128, "Earnings per Share," which will require the
Company to change its method of calculating earnings per share ("EPS"). SFAS No.
128 simplifies the computation of EPS by replacing the presentation of primary
EPS with a presentation of basic EPS. Basic EPS is calculated by dividing income
available to common stockholders by the weighted average number of common shares
outstanding during the period. Options, warrants, and other potentially dilutive
securities are excluded from the calculation of basic EPS. Diluted EPS, which
has not changed significantly from the current calculation of fully diluted EPS,
includes the options, warrants and other potentially dilutive securities that
are excluded from basic EPS. In accordance with the provisions of SFAS No. 128,
the Company will adopt this new standard beginning in 1998. Had the Company
adopted the new standard in fiscal 1997, which is prohibited by the provisions
of SFAS No. 128, diluted EPS would not be significantly different from primary
or fully diluted EPS, and basic EPS would be as follows:
BASIC EPS DILUTED EPS
--------------------------------------------- ---------------------------------------------
YEAR ENDED JUNE 30, YEAR ENDED JUNE 30,
--------------------------------------------- ---------------------------------------------
1997 1996 1995 1997 1996 1995
------------- ------------- ------------- ------------- ------------- -------------
Earnings per share: (in thousands, except per share data)
Net income $4,766 $3,326 $1,990 $4,766 $3,326 $1,990
Earnings per share $ .75 $ .53 $ .32 $ .73 $ .52 $ .32
============= ============= ============= ============= ============= =============
Weighted average number of
common shares outstanding 6,378 6,238 6,198 6,563 6,380 6,236
============= ============= ============= ============= ============= =============
46
11. EMPLOYEE BENEFITS PLANS
Effective July 1, 1994, the Company established a 401(k) savings plan on behalf
of its employees. Employees may contribute up to 20% of their annual
compensation to the plan, subject to statutory maximums. The Company also
established a nonqualified deferred compensation plan where eligible
participants may elect to defer a portion of their compensation until
retirement. The Board of Directors has authorized no matching of employee
contributions by the Company.
12. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the fiscal years ended June 30, 1997,
1996 and 1995, are as follows:
THREE MONTHS ENDED YEAR ENDED
----------------------------------------------------------------------------
SEPT 30 DEC 31 MAR 31 JUNE 30 JUNE 30
------------- --------------- ---------------- ----------------- ------------------
( $ in thousands, except per share amounts)
1997:
Revenues $19,022 $20,097 $26,218 $22,055 $87,392
Net income 344 519 2,569 1,334 4,766
Earnings per share .05 .08 .39 .20 .73
1996:
Revenues $14,067 $14,591 $20,544 $19,757 $68,959
Net income 168 204 1,927 1,027 3,326
Earnings per share .03 .03 .30 .16 .52
1995:
Revenues $10,155 $10,752 $13,124 $13,759 $47,790
Net income 84 158 865 883 1,990
Earnings per share .01 .03 .14 .14 .32
The Company's business is seasonal because of the impact of cashing tax refund
checks and two other tax- related services -- electronic tax filings and
processing applications for refund anticipation loans.
47