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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, 1996
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 (I.R.S. Employer
incorporation or organization) Identification No.)
1231 GREENWAY DRIVE, SUITE 800
IRVING, TEXAS 75038
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(Registrants 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 registrants 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. [ X ]
As of September 6, 1996, 4,219,174 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 National Market System) held by nonaffiliates
of the registrant was approximately $35,584,000.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference from the
Registrants 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 the largest owner and
operator, and one of the largest franchisors of check cashing stores in the
United States. At September 6, 1996, the Company has a total network of over 680
stores in 29 states, including 570 Company-owned 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 has the general objective to have the largest
number of check cashing stores in each of its markets, and management believes
that it has attained this objective in 19 of its 40 markets. ACE intends to open
30 to 40 new stores primarily in its existing markets during its fiscal year
ending June 30, 1997.
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 American Express
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 services.
INDUSTRY OVERVIEW
Industry sources indicate there are approximately 5,500 check cashing stores
nationally and that there are three 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 in order to take advantage of the convenience
and the 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, 1996, 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 and postage stamps; distribute welfare payments and
food stamps; and offer bill payment service.
2
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 and regulatory scrutiny and
complexity are contributing to consolidation of the industry. The Company's
strategy is to position itself to benefit from the consolidation of the industry
and from the competitive advantages that it believes are available to large
operators and franchisors of check cashing stores.
3
GROWTH STRATEGY
ACE's growth strategy is to combine acquisitions and new store openings with
the objective to have the largest number of check cashing stores in each of its
markets. The Company believes that it has achieved this objective in 19 of its
40 markets. Prior to fiscal 1995, 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 98
stores in five metropolitan areas as of June 30, 1988, to 544 stores in 40
market areas as of June 30, 1996. In fiscal 1996, the Company opened 33 stores,
acquired 69 stores (49 of which were in seven new markets) and closed ten
stores. The Company currently anticipates that it will open 30 to 40 new stores
in existing markets and close approximately seven stores during the fiscal year
ending June 30, 1997.
The following table illustrates the development of Company-owned stores since
1990 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 1996 1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
TEXAS:
Dallas/Fort Worth/East Texas 112 103 98 91 83 76 68
Houston 72 60 55 50 40 35 35
San Antonio/Austin 28 24 23 20 18 17 14
COLORADO:
Denver 28 27 21 23 23 21 23
Colorado Springs/Pueblo 13 12 9 9 9 7 8
MARYLAND/WASHINGTON,D.C./VIRGINIA:
Baltimore/Washington,D.C./
Alexandria/Roanoke/Lynchburg 74 71 62 49 35 25 15
GEORGIA:
Atlanta/Albany/Augusta/Macon/
Savannah 47 49 42 15 2 -- --
LOUISIANA:
New Orleans/Baton Rouge 19 19 14 14 7 -- --
ARIZONA:
Phoenix/Tucson 46 37 4 5 3 -- --
NORTH & SOUTH CAROLINA:
Charlotte/Charleston/Columbia/
Greenville/Spartanburg/Orangeburg 16 15 11 -- -- -- --
OHIO:
Cleveland 8 7 4 -- -- -- --
OKLAHOMA:
Oklahoma City 12 12 -- -- -- -- --
NEW MEXICO:
Albuquerque 7 7 -- -- -- -- --
ARKANSAS:
Little Rock 6 4 -- -- -- -- --
MISSOURI:
St. Louis 3 3 -- -- -- -- --
TENNESSEE:
Memphis 5 2 -- -- -- -- --
FLORIDA:
Jacksonville/Orlando/Palm Beach/Tampa 38 -- -- -- -- -- --
WASHINGTON:
Seattle 6 -- -- -- -- -- --
INDIANA:
Indianapolis 4 -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ----
TOTAL 544 452 343 276 220 181 163
==== ==== ==== ==== ==== ==== ====
4
Acquisitions. Of the ACE stores currently in operation, 207 were acquired
since January 1987. The Company acquired 69 of these stores in 12 separate
transactions during fiscal 1996 for an aggregate consideration of $14,432,000.
The Company believes its experience with acquisitions permits it to successfully
integrate additional acquisitions. The Company presently 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 U.S. As of September 6, 1996, the Company had 112
franchise stores open and operating in 23 states, located as follows:
Number
of stores
---------
California 24
Florida 20
Texas 12
Georgia 8
Oregon 6
Ohio 4
North Carolina 4
Tennessee 4
Virginia 4
Wisconsin 3
Other states (13) 23
---
Total 112
===
ACE has created a new division, the ACE Franchise Group, to service and market
new ACE franchises. During June 1996, the Company updated its franchise offering
materials and in July began active marketing efforts. To capitalize on ACEs name
recognition and industry stature, only ACE franchises are being offered in the
future. ACE franchises are being marketed through a commissioned sales force,
supplemented by newspaper, trade journals and other advertising media.
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 (kiosk) franchise, and a conversion
franchise that permits an existing check cashing business to convert to an ACE
franchisee.
CUSTOMERS AND SERVICES
Management believes the Company's core customer group is comprised primarily
of individuals between the ages of 18 and 49 who rent their house or apartment
and hold jobs such as clerical workers, craftsmen and laborers. These customers
tend to change jobs and residence more often than average, have annual family
incomes under $35,000, in many cases 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 to its customers and the revenues (in thousands) from these
services for the indicated fiscal years:
REVENUE CATEGORY 1996 1995 1994 1993 1992
---------------- -------- -------- -------- -------- --------
Check cashing $51,327 $37,488 $31,828 $26,927 $21,880
Money transfers 4,740 1,775 1,155 545 425
Loan fees and interest 2,462 597 164 49 --
Money orders 2,413 2,089 1,800 1,437 1,119
New customer fees 1,338 806 504 416 308
Bill payment services 1,320 819 425 455 346
Food stamp distribution 789 1,684 1,155 728 477
Franchise revenues 633 -- -- -- --
Electronic tax filing 402 533 1,065 824 613
Other fees 3,535 1,999 1,806 1,285 833
------- ------- ------- ------- -------
Total $68,959 $47,790 $39,902 $32,666 $26,001
======= ======= ======= ======= =======
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 and 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 $.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 $.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 transfer services.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 19,000 locations
worldwide. The fees for this service are established by the Money Order
Supplier, and the Company is paid a percentage of the fees it collects from
customers as a commission and remits the balance to the Money Order Supplier.
See "Management's Discussion and Analysis of Financial Condition and the Results
of Operations Liquidity and Capital Resources." During fiscal 1996, ACE's volume
in MoneyGram transactions increased 93% over comparable transactions in fiscal
1995, primarily as a result of acquired stores.
Small Loans. 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 from banks, savings and loans, other
consumer finance businesses and credit cards.
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 postdated personal check. This product generally has a term of
two to four weeks. As of September 6, 1996, this product was offered in 149 of
the Company's stores. On a test basis, ACE also currently offers an unsecured
single installment loan up
6
to $100 in two of its Colorado stores and multiple installment loans up to $300
in an additional four stores in Texas.
Small consumer loan products have a highly structured regulatory environment.
Each ACE store which offers consumer loans is individually licensed under state
laws, which establish allowable interest rates, 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 order sales. The Company sells American Express 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 11.8 million, 9.3 million and 8.3 million money
orders during the 1996, 1995, and 1994 fiscal years, respectively. The face
amount of money orders sold as a percentage of the face amount of checks cashed
was 71.4% in 1996, 76.8% in 1995 and 79.6% in 1994. 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. See " Business Relationship with the Money Order Supplier" and Note 4
of Notes to Consolidated Financial Statements.
New Customer fees. The Company charges a one-time fee for each new check
cashing customer to cover the costs of the initial setup in the ACE customer
database and identification verification.
Food stamp distribution. The Company is a distribution agent for food stamps
in four of its market areas (Albany, Atlanta, Savannah, and Seattle).
Lottery and lotto ticket sales. The Company's owned stores sell lottery and
lotto tickets in most of the jurisdictions in its markets that operate lottery
and/or lotto games (Arizona, Colorado, Florida, Georgia, Indiana, Louisiana,
Maryland, Texas, Virginia and Washington, D.C.).
Electronic tax return filing. The Company utilizes its computerized point of
sale system and software licensed from third parties to provide data entry of
completed federal income tax returns for transmission to the Internal Revenue
Service. Generally, customers file their tax returns electronically to obtain
refund anticipation loans, which are normally available within one to three days
after filing a return. The Company coordinates the electronic filing of tax
returns and processed applications for related refund anticipation loans from
third-party banks or other financial institutions. The lending institutions bear
the sole risk of loss on such loans if the IRS fails to remit the refund.
Other services and products. In addition to the above, in some owned stores
ACE offers a variety of other retail financial products and services to its
customers, including telephone and utility bill payment services, public
transportation passes, copying and fax transmission services and postage stamps,
pagers, prepaid long distance telephone cards and offering secured credit cards
through a third party bank.
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, all of
which are leased, 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 Hypermarts 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. In the lobby of most stores is a
large map that shows the location of all ACE stores in that market.
Normal store business hours 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,
7
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,
as well as 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 easily 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.
REVENUES
YEAR ENDED JUNE 30,
NUMBER OF ($ in thousands)
STORES OPEN AT ---------------------------------------------------
YEAR OPENED: JUNE 30, 1996 1996 1995 1994 1993 1992 1991
-------------- ------ ------ ------ ------ ------ ------
1988 and earlier 80 $154.1 $148.8 $153.2 $156.3 $149.8 $144.3
1989 27 140.0 139.6 134.7 133.8 124.6 111.8
1990 30 134.1 134.1 137.8 142.8 128.0 103.0
1991 18 131.4 127.3 130.0 123.2 95.4 21.3
1992 25 141.7 133.9 128.8 112.7 49.4 --
1993 40 123.7 112.9 95.7 38.6 -- --
1994 46 99.4 82.8 32.2 -- -- --
1995 39 80.2 26.8 -- -- -- --
1996 32 35.1 -- -- -- -- --
---
337
Acquired stores 207
---
544
===
STORE CONTRIBUTION (1)
YEAR ENDED JUNE 30,
NUMBER OF ($ in thousands)
STORES OPEN AT ---------------------------------------------------
YEAR OPENED: JUNE 30, 1996 1996 1995 1994 1993 1992 1991
-------------- ------ ------ ------ ------ ------ ------
1988 and earlier 80 $ 57.2 $ 55.1 $ 60.0 $ 61.5 $ 56.4 $ 53.4
1989 27 53.5 48.2 46.2 47.2 36.8 26.5
1990 30 41.3 37.1 42.4 44.0 32.1 7.4
1991 18 33.1 37.0 41.4 31.0 6.5 (15.5)
1992 25 44.2 36.8 33.9 24.1 (7.6) --
1993 40 34.6 24.0 12.7 (9.2) -- --
1994 46 16.3 2.1 (11.6) -- -- --
1995 39 (5.0) (14.7) -- -- -- --
1996 32 (7.7) -- -- -- -- --
---
337
Acquired stores 207
---
544
===
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 1996, the Company opened 33 stores at an average capital
cost of approximately $45,500 per store.
8
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.
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
metropolitan areas in which ACE operates 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 eleven RVP's who supervise an average of 49 stores each.
The RVP's report to one of two division vice presidents. The Company currently
has 43 district supervisors, each of whom reports to the RVP for his or her
region and is directly responsible for the general management of 10 to 16 stores
within his or her territory. These district supervisors are responsible for
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 it 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;
9
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.
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, and each Company-owned store's security measures include
safes, alarm systems that are monitored by third parties, control over entry to
teller areas, detection of entry through perimeter openings, walls and ceilings
and tracking all employee movement in and out of secured areas. In addition, as
security contracts expire and as new stores are opened, the Company is
centralizing its security measures to strengthen and improve control over
physical security. As of September 6, 1996, 82% 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 to provide security for its facilities and employees,
there can be no assurance that these problems will be eliminated. During the
1996 and 1995 fiscal years, cash shortages from employee errors and from theft
were $1,572,000 (2.3% of revenues) and $916,000 (1.9% 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 Wells Fargo Armored Services Corporation and
Loomis Armored, Inc. ACE employees are not authorized to transport currency or
checks.
EMPLOYEES
At June 30, 1996, ACE employed 1,507 persons: 68 corporate personnel, 11 RVPs,
99 regional personnel, 43 district supervisors and 1,286 other staff. Third-
party firms hired by the Company conduct background and credit report checks of
all 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, 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
10
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.
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. In addition, ACE is subject
to federal and state regulation relating to the reporting and recording of
certain currency transactions.
State Regulations. At least 17 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 ceilings on
fees adopted by Georgia and Ohio -- the only states in which the Company
operated as of June 30, 1996, that regulate such fees -- 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. The Company has no plans to open or
acquire any stores in those states.
As of June 30, 1996, the Company operated a total of 93 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 Relationship with
the Money Order Supplier." In addition, in some jurisdictions check cashing
companies 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.
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 August 1994, Congress passed a bill which suggests, but does not require,
check cashers to disclose their fees to customers and state regulators. In
addition, the bill requires check cashers to register with the U.S. Department
of the Treasury. Specific regulations governing this registration have not yet
been issued. The provisions of the bill have not materially impacted the
Company's operations.
11
RELATIONSHIP WITH THE MONEY ORDER 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 money
orders of American Express Travel Related Services Company, 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 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 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'
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
12
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 the providing MoneyGram wire transfer
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 entered into a letter
agreement with the Money Order Supplier, pursuant to which (i) the maximum
aggregate amount of the Term Advances available to the Company was increased to
its current level of $18.5 million and (ii) the parties executed a separate
agreement, 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 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.
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.
The MoneyGram Agreement also provides for incentives for opening new MoneyGram
service locations after January 1, 1996, and other performance incentives for
the Company. The initial bonus has been deferred and included in other
liabilities in the Company's fiscal 1996 consolidated balance sheet. The bonus
is being amortized to revenues on a straight-line basis over the five-year term
of the MoneyGram Agreement. During the year ended June 30, 1996, $200,000 of
amortization was recorded and included in money transfer services revenues.
The MoneyGram Agreement, like the Money Order Agreement, has been and is
operated and administered by FDC, through IPS as agent for the Money Order
Supplier. 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 has required FDC to hold separate the
consumer money transfer service operated under the "MoneyGram" tradename pending
its divestiture and to divest that service by the end of 1996. The Company's
dealings with FDC or IPS regarding the MoneyGram service have accordingly been
with a separate group or persons within FDC or IPS responsible for that service.
The Company is uncertain about the status of FDC's plans regarding the MoneyGram
service.
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 American Express 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
13
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.
Proposed Private Placement of Debt Securities. The Company is negotiating with
a potential purchaser to issue up to $20 million of debt securities of the
Company in a private placement. The net proceeds of that private placement, if
consummated, would be used to pay the Company's outstanding Term Advances from
the Money Order Supplier and for general corporate purposes. As of September 6,
1996, the outstanding balance of Term Advances was approximately $16.7 million.
Under the Money Order Agreement, the amount of Term Advances repaid may be
reborrowed by the Company for expansion and acquisition of new stores. 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. Consummation of the proposed private
placement will, however, require continued negotiations with the potential
purchaser and the Money Order Supplier. Hence, there can be no assurance that
the private placement will be consummated with the potential purchaser or at
all.
ITEM 2. PROPERTIES
Except for one owned store, all 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'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 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 1996.
14
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCK-HOLDER MATTERS.
The Company's Common Stock is quoted on NASDAQs National Market System
(NASDAQ/NMS) under the symbol AACE. At September 6, 1996 there were
approximately 850 holders of record of the Common Stock.
The following table set forth the high and low sale prices of the Common Stock
as reported by the NASDAQ/NMS for the past two fiscal years:
HIGH LOW
------ ------
Fiscal 1995
Quarter ended September 30, 1994 8-1/4 7
Quarter ended December 31, 1994 8-3/4 6-3/4
Quarter ended March 31, 1995 9-1/2 7-3/4
Quarter ended June 30, 1995 9-1/2 8
Fiscal 1996
Quarter ended September 30, 1995 11-3/4 8-7/8
Quarter ended December 31, 1995 11 9-1/4
Quarter ended March 31, 1996 14-1/2 9-1/4
Quarter ended June 30, 1996 16-1/2 13-3/4
On September 6, 1996, the last reported sale price of the Common Stock on the
NASDAQ/NMS was $14.00 per share.
The Company has never paid dividends on the Common Stock and has no plans to pay
dividends in the foreseeable future. In addition, the Company's ability to pay
cash dividends is limited under the Money Order Agreement. See "Business --
Relationship with the Money Order Supplier."
15
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED JUNE 30,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
($ in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues $ 68,959 $ 47,790 $ 39,902 $ 32,666 $ 26,001
Store expense 48,552 35,584 28,757 23,003 18,273
Region expense 5,647 4,139 3,531 2,910 2,150
Headquarters expense 4,744 3,651 3,392 3,401 3,102
Franchise expenses 458 -- -- -- --
Other depreciation and amortization 2,152 1,219 1,032 730 406
Interest expense (income), net 1,714 103 (173) 175 508
Other expense 236 28 125 27 51
-------- -------- -------- -------- --------
Income before income taxes,
extraordinary item and
cumulative effect of change in
accounting principle 5,456 3,066 3,238 2,420 1,511
Income taxes 2,130 1,076 1,077 883 560
-------- -------- -------- -------- --------
Income before extraordinary item and
cumulative effect of change in
accounting principle 3,326 1,990 2,161 1,537 951
Extraordinary item - utilization of net
operating loss carryovers -- -- -- 715 404
Cumulative effect of change in
accounting for income taxes -- -- 88 -- --
-------- -------- -------- -------- --------
Net income $ 3,326 $ 1,990 $ 2,249 $ 2,252 $ 1,355
======== ======== ======== ======== ========
Earnings per share:
Earnings before extraordinary item
and cumulative effect of change in
accounting principle $ .78 $ .48 $ .52 $ .44 $ .34
Extraordinary item - utilization of
net operating loss carryovers -- -- -- .20 .15
Cumulative effect of change in
accounting for income taxes -- -- .02 -- --
-------- -------- -------- -------- --------
Earnings $ .78 $ .48 $ .54 $ .64 $ .49
======== ======== ======== ======== ========
Weighted average number of common
shares (1) 4,253 4,157 4,162 3,488 2,650
- ------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Cash and cash equivalents $ 56,603 $ 49,249 $ 36,535 $ 20,503 $ 18,156
Total assets 114,684 87,544 59,378 35,122 29,080
Term advances 16,969 9,732 -- -- --
Indebtedness to money order supplier 56,645 48,710 34,390 13,811 25,412
Shareholders equity 25,236 21,294 19,291 17,028 327
- --------------------------------------------------
(1) Includes common shares and common share equivalents, in thousands.
16
SUPPLEMENTAL STATISTICAL DATA
YEAR ENDED JUNE 30,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
COMPANY-OWNED STORES IN OPERATION:
Beginning of year 452 343 276 220 181
Acquired 69 77 32 16 17
Opened 33 40 47 47 29
Closed (10) (8) (12) (7) (7)
------- ------- ------ ------ ------
End of year 544 452 343 276 220
======= ======= ====== ====== ======
Percentage increase in comparable store
revenues from prior year:
Exclusive of tax-related revenues (1) 4.1% 2.9% 1.3% 8.4% 5.7%
Total revenues (2) 4.7% 1.6% 1.0% 7.8% 8.4%
Capital expenditures (in thousands) $ 3,435 $ 4,187 $4,367 $3,465 $3,185
Cost of net assets acquired (in
thousands) $14,432 $14,000 $4,846 $ 941 $1,900
- ------------------------------------------------------------------------------------------
OPERATING DATA:
Face amount of checks cashed
(in millions) $ 2,144 $ 1,567 $1,309 $1,131 $ 955
Face amount of money orders sold
(in millions) $ 1,531 $ 1,213 $1,042 $ 872 $ 712
Face amount of money orders sold as a
percentage of the face amount of
checks cashed 71.4% 77.4% 79.6% 77.0% 74.6%
Face amount of average check $ 285 $ 284 $ 286 $ 282 $ 276
Average fee per check $ 6.81 $ 6.79 $ 6.94 $ 6.72 $ 6.33
Number of checks cashed (in thousands) 7,535 5,516 4,585 4,007 3,454
Number of money orders sold
(in thousands) 11,835 9,334 8,266 7,233 6,053
- ------------------------------------------------------------------------------------------
COLLECTIONS DATA:
Face amount of returned checks (in
thousands) $ 8,661 $ 6,206 $5,196 $3,721 $3,720
Collections (in thousands) 5,004 3,786 3,304 2,542 2,402
------- ------- ------ ------ ------
Net write offs (in thousands) $ 3,657 $ 2,420 $1,892 $1,179 $1,318
======= ======= ====== ====== ======
Collections as a percentage of
returned checks 57.8% 61.0% 63.6% 68.3% 64.6%
Net write-offs as a percentage of
revenues 5.3% 5.1% 4.7% 3.6% 5.1%
Net write-offs as a percentage of
the face amount of checks cashed .17% .15% .14% .10% 14%
(1) Change in revenues computed excluding electronic tax filing and tax refund
check cashing for both years compared.
(2) Calculated based on the changes in revenues of all stores open for both of
the full years compared.
17
PART I.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE ANALYSIS
- -----------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
--------------------------------------------------------------------
($ IN THOUSANDS) (PERCENTAGE OF REVENUE)
1996 1995 1994 1996 1995 1994
-------- -------- -------- -------- -------- --------
Check fees $44,664 $33,008 $28,071 64.8% 69.1% 70.3%
Tax check fees 6,663 4,480 3,757 9.7 9.4 9.4
Money transfer services 4,740 1,775 1,155 6.9 3.7 2.9
Loan fees and interest 2,462 597 164 3.6 1.2 0.4
Money order sales 2,413 2,089 1,800 3.5 4.4 4.5
New customer fees 1,338 806 504 1.9 1.7 1.3
Bill payment services 1,320 819 425 1.9 1.7 1.1
Food stamp distribution 789 1,684 1,155 1.1 3.5 2.9
Franchise revenues 633 -- -- 0.9 -- --
Electronic tax filings 402 533 1,065 0.6 1.1 2.7
Other fees 3,535 1,999 1,806 5.1 4.2 4.5
------- ------- ------- ----- ----- -----
Total revenue $68,959 $47,790 $39,902 100.0% 100.0% 100.0%
======= ======= ======= ===== ===== =====
Average revenue per store $138.5 $125.1 $128.9
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 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 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 increased $0.5 million, principally as a result of new
contracts with utility companies. Franchise revenues were franchise royalties
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 in
fiscal 1996 as compared to 60 in fiscal 1995.
18
Fiscal 1995 Compared to Fiscal 1994. Revenue increased $7.9 million, or 19.8%,
from $39.9 million in the year ended June 30, 1994 to $47.8 million in the year
ended June 30, 1995. This revenue growth resulted from a $571,000, or 1.6%,
increase in comparable store revenues (266 stores) and a $7.3 million increases
from stores which were opened or acquired after June 30, 1993, and were
therefore not open for both of the full periods compared. The number of open
stores increased by 109, or 31.8%, from 343 stores open at June 30, 1994 to 452
stores open at June 30, 1995.
The increase in total check cashing fees accounted for 77.2% of the total
revenue increase. Check cashing fees increased $5.7 million, or 17.8%, from
$32.0 million in 1994 to $37.5 million in 1995. This increase resulted from a
21.2% increase in the total number of checks cashed, an increase of $723,000, or
19.2%, in tax check fees, offset by a 2.7% decrease in the average fee per
check. Electronic tax filings decreased $532,000, or 50.0%, principally as a
result of changes in the Internal Revenue Service policies relating to delays in
processing returns, notification procedures to lending banks and other changes
which diminished the products appeal.
Money transfer services increased $620,000, or 53.7%, principally as a result
of continued promotion activities by the money transfer services company. Food
stamp distribution revenues increased $529,000, or 45.8%, principally as a
result of a food stamp distribution contract assumed through an acquisition in
December 1994 and the addition of food stamp distribution contracts in East
Texas and in four Dallas stores. See "Operating Trends Electronic Benefits
Transfer." Bill payment services increased $394,000, principally as a result of
a new contract with a major utility company for the Company's stores to serve as
payment centers.
Loan fees and interest increased 264% to $597,000 in fiscal 1995 as compared
to $164,000 in fiscal 1994. This increase relates primarily to the increase in
the number of stores offering the Company's loan products to 60 in fiscal 1995
as compared to 18 in fiscal 1994.
STORE EXPENSE ANALYSIS YEAR ENDED JUNE 30,
- ---------------------------------------------------------------------------------------
($ IN THOUSANDS) (PERCENTAGE OF REVENUE)
1996 1995 1994 1996 1995 1994
-------- -------- -------- -------- -------- --------
Salaries and benefits $20,786 $15,465 $12,642 30.1% 32.4% 31.7%
Occupancy 11,284 8,677 7,005 16.4 18.2 17.6
Armored and security 2,926 2,396 1,965 4.2 5.0 4.9
Returns and cash shorts 5,472 3,612 2,808 7.9 7.6 7.0
Loan losses 461 60 -- 0.7 0.1 --
Depreciation 2,752 2,074 1,663 4.0 4.3 4.2
Other 4,871 3,299 2,674 7.1 6.9 6.7
------- ------- ------- ---- ---- ----
Total store expense $48,552 $35,583 $28,757 70.4% 74.5% 72.1%
======= ======= ======= ==== ==== ====
Average per store expense $97.5 $93.2 $92.9
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 increase 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.
19
Fiscal 1995 Compared to Fiscal 1994. Store expenses increased $6.8 million, or
23.6%, in fiscal 1995 over fiscal 1994, primarily as a result of the larger
number of stores open during the period. Average store expense remained constant
at approximately $93,200 per store. Store expenses increased as a percentage of
revenues, increasing from 72.1% in 1994 to 74.5% in 1995, principally as a
result of the decline 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 $804,000, or 28.6%, in fiscal 1995 as
compared to fiscal 1994, primarily as a result of the additional stores open
during the period. Returned checks, net of collections, and cash shortages
increased as a percentage of revenues from 7.0% in fiscal 1994 to 7.6% in fiscal
1995.
OTHER EXPENSE ANALYSIS YEAR ENDED JUNE 30,
- -----------------------------------------------------------------------------------------------------
($ in thousands) (Percentage of revenue)
1996 1995 1994 1996 1995 1994
-------- -------- -------- -------- -------- --------
Region expenses $5,647 $4,139 $3,531 8.2% 8.7% 8.8%
Headquarters expenses 4,744 3,651 3,392 6.9 7.6 8.5
Franchise expense 458 -- -- 0.7 -- --
Other depreciation and amortization 2,152 1,219 1,032 3.1 2.6 2.6
Interest expense (income) 1,714 103 (173) 2.5 0.2 (0.4)
Other expense 236 28 125 0.3 0.1 0.3
REGION EXPENSE
Fiscal 1996 Compared to Fiscal 1995. Region expense increased $1.5 million, or
36%, in fiscal 1996 versus 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 were in the expanded Southeastern and
Southwestern regions and increased 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.
Fiscal 1995 Compared to Fiscal 1994. Region expense increased $0.6 million, or
17%, in fiscal 1995 versus fiscal 1994. The increase is primarily the result of
increased salaries and benefits for the addition of 13 region personnel in
fiscal 1995 as a result of adding stores in existing regions. In addition,
fiscal 1995 expenses included full year expenses for the Ohio region and the
division management added during late fiscal 1994. Region expense remained
nearly constant as a percentage of revenues at 8.8% for fiscal 1994 and 8.7% for
fiscal 1995. In addition, operations support and field auditors personnel cost
increased $157,000 and $53,000, respectively.
HEADQUARTERS EXPENSE
Fiscal 1996 Compared to Fiscal 1995. Headquarters expense 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 totaling $300,000. No corporate management bonuses were paid
in fiscal 1995. Headquarters expense continued to decrease as a percentage of
revenues from 7.6% in fiscal 1995 to 6.9% in fiscal 1996.
Fiscal 1995 Compared to Fiscal 1994. Headquarters expense increased $259,000, or
7.6%, in fiscal 1995 over fiscal 1994. The increase is primarily the result of
increases in headquarters personnel, and related salary increases. No corporate
management bonuses were paid in fiscal 1995 or fiscal 1994. Headquarters expense
continued to decrease as a percentage of revenues from 8.5% in fiscal 1994 to
7.6% in fiscal 1995.
FRANCHISE EXPENSE
Franchise expense relates 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.
20
OTHER DEPRECIATION AND AMORTIZATION
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 at the end of the
fourth quarter of fiscal 1995.
Fiscal 1995 Compared to Fiscal 1994. Other depreciation and amortization
increased $0.2 million , or 18%, for fiscal 1995 as compared to fiscal 1994.
This increase was primarily attributable to an increase in amortization of
intangibles (goodwill and non-competition agreements) resulting from the 77
stores acquired during fiscal 1995.
INTEREST EXPENSE
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.
Fiscal 1995 Compared to Fiscal 1994. Interest expense, net of interest income,
increased $0.3 million, in fiscal 1995 as compared to fiscal 1994. This increase
was primarily attributable to increased borrowings under the Term Advance credit
facility to fund the acquisition of 77 stores during fiscal 1996.
OTHER EXPENSE
Fiscal 1996 Compared to Fiscal 1995. Other expense increased $0.2 million, in
fiscal 1996 as compared to fiscal 1995 as a result of increased store closing
costs in fiscal 1996.
Fiscal 1995 Compared to Fiscal 1994. Other expense decreased $97,000, in fiscal
1995 as compared to fiscal 1994 as a result of reduced store closing costs in
fiscal 1995.
INCOME TAXES
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 plus (for fiscal 1996 only) non-deductible goodwill associated with
the acquisition of Check Express, Inc.
Fiscal 1995 Compared to Fiscal 1994. A total of $1.1 million was provided for
income taxes for each of fiscal 1995 and fiscal 1994. The provisions for income
taxes in fiscal 1995 and fiscal 1994 were calculated based on the statutory
federal income tax rate of 34%, plus a provision for state income taxes. In
1995, the provision was reduced by $56,000 due to the elimination of the priors
year's tax asset valuation reserve. See Note 9 to Notes to Consolidated
Financial Statements.
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, 1996, cash and cash equivalents and
money order principal payable increased principally as a result of the increase
in the number of stores operated, from 452 at June 30, 1995, to 544 at June 30,
1996, and the timing of scheduled remittances of money orders.
Property and equipment and the excess purchase price over the fair value of net
assets acquired increased $4.0 million and $7.4 million, respectively, as a
result of the 69 stores acquired and the 33 stores opened during the year ended
June 30, 1996, offset by related depreciation and amortization.
21
Term advances from the Money Order Supplier increased by $7.2 million for the
year ended June 30, 1996. This change is comprised of advances of $8.8 million
to fund new and acquired stores, less payments of $1.6 million. Other
liabilities increased by $2.3 million during the year ended June 30, 1996,
principally as a result of the deferred income related to advance payments from
the Money Order Supplier, less related amortization.
LIQUIDITY AND CAPITAL RESOURCES
Financing Provided by the Money Order Supplier. The Money Order Agreement
provides a commitment by the Money Order Supplier to make advances to the
Company, which generally may 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. Term Advances
bear interest at 1% over the prime rate. See "Business Relationship with the
Money Order 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 September 6, 1996, approximately
$1.8 million of the Term Advances commitment is 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 Relationship with the Money Order
Supplier" and Note 4 of Notes to Consolidated Financial Statements.
Bonuses under MoneyGram Agreement. Under the MoneyGram Agreement, in June 1996,
the Company received an initial bonus of $2 million. That initial bonus will be
recognized as revenue on a straight-line basis over the five-year term of the
MoneyGram Agreement. 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 aggregate amount of those additional
bonuses and incentives earned by the Company from January 1 through June 30,
1996, was $393,000.
Proposed Private Placement of Debt Securities. The Company is negotiating with a
proposed purchaser to issue up to $20 million of debt securities of the Company
in a private placement. The Company plans to use the net proceeds of that
private placement, if consummated, to repay the outstanding Term Advances from
the Money Order Supplier and for general corporate purposes. Under the Money
Order Agreement, the Term Advances, once paid, may be reborrowed by the Company
for expansion and acquisition of new stores. Consummation of the proposed
private placement will, however, require continued negotiations with the
potential purchaser and the Money Order Supplier. Hence, there can be no
assurance that the private placement will be consummated with the potential
purchaser or at all.
22
Capital Expenditures and Financing. During fiscal 1996, 1995 and 1994, the
Company had net cash provided by operating activities of $10.4 million, $6.6
million and $3.5 million, respectively. During fiscal 1996, 1995 and 1994, the
Company used $3.4 million, $4.2 million and $4.4 million, respectively, for
purchases of property and equipment related to new stores and other capital
expenditures.
Net cash provided by financing activities for fiscal 1996, 1995 and 1994 were
$14.6 million, $22.5 million and $19.5 million, respectively. Advances and
borrowings from the Money Order Supplier increased $7.9 million in fiscal 1996,
$14.3 million in fiscal 1995 and $20.1 million in fiscal 1994. The increase in
fiscal 1996 relates primarily to higher check cashing volume due to the
additional 92 stores in operation at the end of the fiscal year compared to
fiscal 1995.
Total capital expenditures, including liabilities incurred in connection with
acquired stores, amounted to $17.7 million, $18.2 million and $9.2 million in
the years ended June 30, 1996, 1995 and 1994, respectively. Capital
expenditures, exclusive of acquisitions, principally related to new store
openings and remodeling existing stores.
The Company's total budgeted capital expenditures, excluding acquisitions, are
currently anticipated to be approximately $3.5 million during its year ending
June 30, 1997, in connection with the opening of 30 to 40 new stores and the
relocation or remodeling of certain existing stores. 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 1997. 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.
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 compared to fiscal 1994. For fiscal
1996, 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.
Results of operations also depend significantly upon the timing and amount of
revenues and expenses associated with the addition of new stores.
IMPACT OF INFLATION
Management believes that the Company's results of operations are not dependent
upon the levels of inflation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14 (a) 1. and 2. for information required for this item.
23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
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, 1996 (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................................... F-1
Consolidated balance sheets as of June 30, 1996 and 1995................... F-2
Consolidated statements of earnings for the years ended June 30, 1996,
1995 and 1994............................................................ F-3
Consolidated statements of shareholders' equity for the years ended
June 30, 1996, 1995 and 1994............................................. F-4
Consolidated statements of cash flows for the years ended June 30, 1996,
1995 and 1994............................................................ F-5
Notes to consolidated financial statements................................. F-6
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.
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.)
24
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 under the
Securities Exchange Act of 1934) (Included as Exhibit 10.4 to the
Registration Statement and incorporated herein by reference.)
10.3 Agreement Regarding Stock Pledges dated as of November 20, 1992, between
the Company and the shareholders pledging shares of Common Stock to
secure the performance of the Company's obligations under the Money
Order Agreement. (Included as Exhibit 10.7 to 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.)
25
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.E. & C. Financial, Inc. David Christenholz, Gloria Guerra-Lyva,
and Bank One, Arizona, NA, as escrow agent. (Included as Exhibit 2.2 to
the 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 10.15 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.
10.27 1996-B Amendment to the MoneyGram Agreement dated June 27, 1996, between
the Company and the Money Order Supplier.
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
(b) Reports on Form 8-K
None
26
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/ THOMAS E. LARSON
----------------------------------
Thomas E. Larson
Senior Vice President-Finance
Chief Financial Officer and Secretary
Date: September 19, 1996
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 September 19, 1996
- ----------------------------------
Raymond C. Hemmig
/s/ DONALD H. NEUSTADT President and Chief Executive Officer, September 19, 1996
- ---------------------------------- Director (Principal Executive Officer)
Donald H. Neustadt
/s/ THOMAS E. LARSON
- ---------------------------------- Senior Vice President - Finance, Chief September 19, 1996
Thomas E. Larson Financial Officer, Treasurer and
Secretary (Principal Financial and
Accounting Officer)
/s/ HOWARD W. DAVIS Director September 19, 1996
- ----------------------------------
Howard W. Davis
/s/ MARSHALL B. PAYNE Director September 19, 1996
- ----------------------------------
Marshall B. Payne
/s/ EDWARD W. ROSE III Director September 19, 1996
- ----------------------------------
Edward W. Rose III
/s/ CHARLES DANIEL YOST Director September 19, 1996
- ----------------------------------
Charles Daniel Yost
27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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, 1996 and
1995, and the related consolidated statements of earnings, shareholders' equity
and cash flows for each of the three years in the period ended June 30, 1996.
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, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1996, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Dallas, Texas
September 6, 1996
28
ACE CASH EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30,
---------------------
1996 1995
----------- ---------
(in thousands)
Cash and cash equivalents $ 56,603 $49,249
Accounts and notes receivable, net 4,891 1,633
Prepaid expenses 328 427
Inventories 2,084 1,633
Property and equipment, net 19,469 15,431
Covenants not to compete, net 2,372 2,619
Excess of purchase price over fair
value of assets acquired, net 23,124 15,692
Other assets 2,616 860
Net assets held for sale 3,197 --
-------- --------
$114,684 $87,544
======== =======
LIABILITIES AND SHAREHOLDERS EQUITY
Money order principal payable $ 35,488 $26,479
Revolving advances from money order
supplier 21,157 22,232
Accounts payable and accrued liabilities 10,411 6,408
Notes payable 2,320 565
Term advances from money order supplier 16,969 9,732
Other liabilities 3,103 835
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
4,216,204 and 4,136,916 shares 42 41
issued and outstanding,
respectively
Additional paid-in capital 18,130 17,514
Retained earnings 7,064 3,738
-------- -------
Total shareholders equity 25,236 21,293
-------- -------
$114,684 $87,544
======== =======
See notes to consolidated financial statements.
29
ACE CASH EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED JUNE 30,
-------------------------------------
1996 1995 1994
--------- --------- ---------
($ in thousands,
except per share amounts)
Revenues $68,959 $47,790 $39,902
Store expenses:
Salaries and benefits 20,786 15,465 12,642
Occupancy 11,284 8,677 7,005
Depreciation 2,752 2,074 1,663
Other 13,730 9,368 7,447
------- ------- -------
Total store expenses 48,552 35,584 28,757
Region expenses 5,647 4,139 3,531
Headquarters expenses 4,744 3,651 3,392
Franchise expenses 458 -- --
Other depreciation and amortization 2,152 1,219 1,032
Interest expense (income) 1,714 103 (173)
Other expenses 236 28 125
------- ------- -------
Income before income taxes and
cumulative effect of change in
accounting principle 5,456 3,066 3,238
Income taxes 2,130 1,076 1,077
------- ------- -------
Income before cumulative effect of
change in accounting principle 3,326 1,990 2,161
Cumulative effect of change in
accounting for income taxes -- -- 88
------- ------- -------
Net income $ 3,326 $ 1,990 $ 2,249
======= ======= =======
Earnings per share:
Earnings before cumulative effect of
change in accounting principle $.78 $.48 $.52
Cumulative effect of change in
accounting for income taxes -- -- .02
------- ------- -------
Earnings $.78 $.48 $.54
======= ======= =======
Weighted average number of common and
common equivalents shares outstanding 4,253 4,157 4,162
See notes to consolidated financial statements.
30
ACE CASH EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
($ IN THOUSANDS)
COMMON STOCK ADDITIONAL RETAINED TOTAL
--------------------- PAID-IN EARNINGS SHAREHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
--------- ---------- ------------- --------- ------------
BALANCE, JULY 1, 1993 4,115,716 $ 41 $ 17,487 $ (500) $ 17,028
Stock options exercised 12,250 -- 15 -- 15
Net income -- -- -- 2,249 2,249
--------- ---------- ------------- --------- ------------
BALANCE, JUNE 30, 1994 4,127,966 41 17,502 1,749 19,292
Stock options exercised 8,950 -- 12 -- 12
Net income -- -- -- 1,989 1,989
--------- ---------- ------------- --------- ------------
BALANCE, JUNE 30, 1995 4,136,916 41 17,514 3,738 21,293
Stock options exercised 79,288 1 616 -- 617
Net income -- -- -- 3,326 3,326
--------- ---------- ------------- --------- ------------
BALANCE, JUNE 30, 1996 4,216,204 $ 42 $ 18,130 $ 7,064 $ 25,236
========= ========== ============= ========= ============
See notes to consolidated financial statements.
31
ACE CASH EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
--------------------------------
1996 1995 1994
----------- ---------- ---------
($ in thousands)
Cash flows from operating activities:
Net income $ 3,326 $ 1,990 $ 2,249
Adjustments to reconcile net income
to net cash provided
by operating activities:
Depreciation and amortization 4,908 3,293 2,695
Change in deferred taxes (995) 232 287
Recognition of deferred revenue (278) (178) (305)
Changes in assets and liabilities:
Accounts and notes receivable, net (1,541) (148) (1,183)
Prepaid expenses 14 (31) (135)
Inventories (451) (125) (367)
Other assets (1,260) (346) (309)
Accounts payable and other 6,690 1,912 589
liabilities -------- -------- -------
Net cash provided by 10,411 6,599 3,521
operating activities
Cash flows from investing activities:
Purchases of property and equipment,
net (3,435) (4,187) (4,367)
Cost of net assets acquired (14,219) (12,239) (2,620)
-------- -------- -------
Net cash used by investing
activities (17,654) (16,426) (6,987)
Cash flows from financing activities:
Net borrowings from money order
supplier 7,935 14,321 20,113
Term advances from money order
supplier 8,768 9,732 --
Payments on notes payable (1,192) (1,525) (630)
Payment of term advances from money
order supplier (1,531) -- --
Proceeds from stock options exercised 617 13 15
-------- -------- -------
Net cash provided by financing
activities 14,597 22,541 19,498
-------- -------- -------
Net increase in cash and cash
equivalents 7,354 12,714 16,032
Cash and cash equivalents, beginning
of year 49,249 36,535 20,503
-------- -------- -------
Cash and cash equivalents, end of year $ 56,603 $ 49,249 $36,535
======== ======== =======
Supplemental disclosures of cash flows
information:
Cash paid for:
Interest $ 1,646 $ 64 $ 30
Income taxes 1,798 572 1,254
Supplemental schedule of non-cash
investing activities:
Liabilities incurred in connection
with acquired stores $ 213 $ 1,761 $ 2,225
See notes to consolidated financial statements.
32
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 check cashing, money order, wire transfer and other transactional
services to customers for a fee. On September 6, 1996, the Company owned and
operated 570 stores in eighteen states and the District of Columbia. In
addition, the Company has 112 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 a maturity of three months or less
to be cash equivalents.
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,
------------------
1996 1995
-------- --------
($ in thousands)
Lottery tickets inventory $1,730 $1,417
Supplies 65 43
Other inventory 289 173
------ ------
$2,084 $1,633
====== ======
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, ranging from three to ten years. Depreciation is
calculated on a straight-line basis.
33
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 $162,000 and $161,000 at June 30,
1996 and 1995, 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. Company management
annually evaluates the useful life of the excess of purchase price over fair
value, its carrying value and its expected benefits in relation to the results
of operations.
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
security costs, net returned checks, cash shortages and other costs incurred by
the stores.
Franchise Accounting
With the acquisition of Check Express, Inc. and its wholly-owned franchising
subsidiaries on February 1, 1996, the Company entered the franchising business.
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 year ended June 30, 1996, $633,000 of franchise fee 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.
Installment Notes Receivable and Interest Income Recognition
The Company, through its wholly owned subsidiary Check Express Finance, Inc.,
purchases installment notes receivable originated by selected used automobile
dealers (auto loans) at a discount. These auto loans are collateralized by the
automobile, and the Company has recourse agreements in place with the dealers
such that repossession and resale of the collateral supporting non-performing
loans is the responsibility of the dealers. The Company currently purchases
these auto loans primarily from two automobile dealers located in Central
Florida. See Note 14 regarding subsequent event.
Income Taxes
Effective July 1, 1993, the Company implemented the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
No. 109"). 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. Prior to the implementation of SFAS No.
109, the Company accounted for income taxes using Accounting Principles Board
Opinion No. 11.
34
Earnings Per Share
Earnings per share has 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 years' amounts have been reclassified to conform to the current
year's presentation.
Recently Issued Accounting Pronouncements
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 will have no effect on the consolidated financial statements.
The Financial Accounting Standards Board has issued Statement of Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of. SFAS No. 121 requires that long-lived
assets and certain identifiable intangible assets be reviewed for impairment
whenever events indicate that the carrying amount of an asset may not be
recoverable. Company management annually evaluates the carrying value of its
long-lived assets in relation to results of operations.
2. PROPERTY AND EQUIPMENT
JUNE 30,
---------------------
1996 1995
--------- ---------
($ in thousands)
Property and equipment, at cost:
Store equipment, furniture and
fixtures $ 15,385 $ 12,206
Leasehold improvements 12,113 8,936
Signs 3,497 2,812
Other 799 696
-------- -------
31,794 24,650
Less -- accumulated depreciation and
amortization (12,325) (9,219)
-------- -------
$ 19,469 $15,431
======== =======
35
3. ACQUISITIONS
On February 1, 1996, the Company purchased all the outstanding common stock of
Check Express, Inc. (Check Express) which became a wholly-owned subsidiary of
the Company. Check Express and its wholly-owned subsidiaries owned and operated
29 check cashing stores in Florida, Indiana and Washington and also had 164
franchised stores at the date of the acquisition. In addition, its wholly owned
subsidiary, Check Express Finance, Inc., purchased installment notes receivable
from two automobile dealers in Central Florida. Total consideration for the
purchase was $6,525,000. The acquisition was accounted for using the purchase
method of accounting. Operations for the period from February 1, 1996, to June
30, 1996, are included in the Company's operations for fiscal 1996.
During the year ended June 30, 1996, the Company acquired the assets of 41
additional stores in 11 separate purchases from third parties for an aggregate
consideration of $5,047,000. The unaudited pro forma results of operations of
the combined entities as if all fiscal 1996 acquisitions had occurred at the
beginning of each fiscal year is presented as follows (in thousands, except for
per-share data):
JUNE 30,
--------------------
1996 1995
--------- ---------
Revenues $73,206 $57,260
Net income 3,581 2,892
Earnings per share:
Net income $ .84 $ .70
Weighted average shares outstanding 4,253 4,157
During the year ended June 30, 1995, the Company acquired the assets of 77
stores in eleven separate purchases from third parties for an aggregate
consideration of $14,000,000. During the year ended June 30, 1994, the Company
acquired the assets of a total of 32 stores in seven separate transactions from
third parties for an aggregate consideration of $4,846,000. As a condition of
each purchase, the sellers agreed not to compete with the Company for specified
periods ranging from two to five years. All acquisitions have been accounted for
using the purchase method of accounting. Covenants not to compete were valued at
contractually agreed upon amounts which management believes corresponded to fair
value.
JUNE 30,
---------------------
1996 1995
--------- ---------
($ IN THOUSANDS)
Covenants not to compete, at cost $ 3,812 $ 3,377
Less -- accumulated amortization (1,440) (758)
------- -------
$ 2,372 $ 2,619
======= =======
The excess purchase price over fair value of net assets acquired are as follows:
JUNE 30,
---------------------
1996 1995
---------- ---------
($ IN THOUSANDS)
Excess of purchase price over fair
value of net assets acquired at cost $24,566 $16,497
Less -- accumulated amortization (1,442) (805)
------- -------
$23,124 $15,692
======= =======
36
4. FINANCING ARRANGEMENTS AND GUARANTEES
Most of the Company's funds for the operation of its check cashing business,
ACE's primary business, are derived from American Express Travel Related
Services, 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 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 advances,
including working capital advances ("Revolver Advances") 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. The Company's obligations under the
Money Order Agreement are collateralized by all the assets of the Company. The
weighted average interest rate on short-term borrowings under the Money Order
Agreement was 9.91%, 9.84%, and 7.79% for the years ended June 30, 1996, 1995
and 1994, respectively.
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 Company for the immediately preceding fiscal year
and (ii) after December 1, 1994, 10% of 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 September 6, 1996, approximately
$1.8 million of the Term Advances commitment is available for acquisitions.
At June 30, 1996, the Company had $16,969,000 in outstanding Term Advances which
were used to fund fiscal 1995 and 1996 acquisitions. Principal payments of
$316,000 are due monthly through December 31, 1998, when the remaining principal
of approximately $7,489,000 is due. Interest at 1% over the prime interest rate
(totaling 9.25% at September 6, 1996) is due monthly.
37
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.
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 the providing of MoneyGram wire
transfer services 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.
MoneyGram Services. On February 1, 1996, the Company entered into a letter
agreement with the Money Order Supplier, pursuant to which (i) the maximum
aggregate amount of the Term Advances available to the Company was increased to
its current level of $18.5 million and (ii) the parties executed a separate
agreement, 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 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.
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. 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, and other performance incentives. The initial bonus
has been deferred and included in other liabilities in the Company's fiscal 1996
consolidated balance sheet. The bonus is being amortized to revenues on a
straight line basis over the five year term of the MoneyGram Agreement. During
the year ended June 30, 1996, $200,000 of amortization was recorded and included
in money transfer services revenues.
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
JUNE 30,
-------------------
1996 1995
-------- --------
($ IN THOUSANDS)
Accounts payable -- trade $ 3,578 $2,022
Accrued salaries 2,248 1,505
Money transfer payable 1,194 1,210
Accrued bank charges 522 504
Income taxes payable 1,276 273
Other 1,593 894
------- ------
$10,411 $6,408
======= ======
38
6. NOTES PAYABLE
In connection with the acquisition of Check Express, Inc. and its wholly owned
subsidiaries on February 1, 1996, all the outstanding indebtedness of those
companies are included in the Company's consolidated balance sheet. As of June
30, 1996, the following amounts were outstanding under these notes. No
additional borrowings have been made under these lending facilities. The fair
value of these notes does not materially differ from their carrying value.
JUNE 30,
-----------------
1996 1995
------- -------
($ IN THOUSANDS)
Notes payable to banks:
Note payable to bank, 8.5%, due in
monthly principal and interest
installments to 2003(a) $ 85 $ --
Note payable to bank, 8.25% ,due in
monthly principal and interest
installments to 2001(a) 652 --
Note payable to bank, 11.125% (b) 34 --
Note payable to bank, 11.125% (b) 17 --
Note payable to bank, 11.125% (b) 88 --
Note payable to bank, 11.125% (b) 149 --
Note payable to bank, 12.75% (b) 203 --
------ -------
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 1999 779 --
Notes payable for acquired stores at
interest rates varying from 6% to
9.25%, due in 1997 203 565
Other 110 --
------ -------
$2,320 $ 565
====== =======
(a) Collateralized by substantially all the assets of Check Express, Inc.
(b) Collateralized by certain identified installment auto loans. Weekly
remittance of principal and interest are due as auto loan payments are
collected, due in 1997.
A substantial portion of the notes payable mature during the year ending June
30, 1997. Management anticipates all notes payable will be repaid during fiscal
1997 utilizing working capital from operations including the anticipated
proceeds from the planned sale of the auto loan portfolio. See Note 14.
7. OTHER LIABILITIES
JUNE 30,
----------------
1996 1995
------- -------
($ IN THOUSANDS)
Deferred revenue $3,033 $ 251
Deferred taxes -- 141
Other 70 443
------ -----
$3,103 $ 835
====== =====
39
8. SHAREHOLDERS' EQUITY
The Company sponsors a Stock Option Plan (as amended, the "Plan") for eligible
employees. There are 408,812 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.
The following table summarizes stock option activity under the Plan:
Available for Weighted
------------- --------
Reserved Granted Grant Average Price
--------- -------- ------ -------------
Shares at June 30, 1993 309,300 191,500 117,800 $ 9.20
Exercised (12,250) (12,250) -- 1.79
Canceled -- (45,950) 45,950 11.50
Granted -- 150,656 (150,656) 9.09
------- ------- --------
Shares at June 30, 1994 297,050 283,956 13,094 9.09
Increase in shares reserved for options 200,000 -- 200,000 --
Exercised (8,950) (8,950) -- 1.79
Canceled -- (23,800) 23,800 11.50
Granted -- 84,050 (84,050) 8.04
------- ------- --------
Shares at June 30, 1995 488,100 335,256 152,844 8.85
Exercised (79,288) (79,288) -- 6.71
Canceled -- (58,891) 58,891 9.02
Granted -- 113,450 (113,450) 9.08
------- ------- --------
Shares at June 30, 1996 408,812 310,527 98,285 $ 9.30
======= ======= ========
At June 30, 1996, the outstanding options as to 310,527 shares have exercise
prices ranging from $7.50 to $16.00 (fair market value on dates of grant).
Options as to 150,538 shares are exercisable at a weighted average exercise
price of $9.93.
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 60,000 shares reserved for issuance. Options as to
17,000 shares were granted under the plan at a weighted average exercise price
of $8.96 a share. None were exercised or canceled. A total of 5,000 shares are
exercisable at June 30, 1996.
9. INCOME TAXES
The provision for income taxes consists of the following:
YEAR ENDED JUNE 30,
--------------------------
1996 1995 1994
-------- -------- --------
($ in thousands)
Current:
Federal income tax $2,638 $ 669 $ 633
State income tax 488 175 157
------ ------ ------
3,126 844 790
Deferred (996) 232 287
------ ------ ------
$2,130 $1,076 $1,077
====== ====== ======
40
The net deferred tax asset (liability) consists of the following:
JUNE 30,
-------------------
1996 1995
-------- --------
($ in thousands)
Gross assets $1,577 $ 460
Gross liabilities (723) (601)
------ ------
Net deferred tax asset (liability) 854 $ (141)
====== ======
The tax effect of significant temporary differences representing deferred tax
assets and liabilities are as follows:
JUNE 30,
------------------
1996 1995
-------- --------
($ in thousands)
Accrued liabilities $ 327 $ 301
Deferred revenue 1,182 99
Depreciation and amortization (655) (541)
------ ------
$ 854 $ (141)
====== ======
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,
----------------------------
1996 1995 1994
-------- --------- ---------
($ in thousands)
Federal income tax provision on income
at statutory rate of 34% $1,855 $1,042 $1,101
State taxes, net of federal benefit 239 127 103
Targeted jobs tax credit, net -- (33) --
Amortization of excess purchase price
over fair value of assets acquired 31 16 16
Tax-exempt interest -- (10) (48)
Reduction in prior years taxes -- (56) (97)
Other-net 5 (10) 2
------ ------ ------
Income tax provision $2,130 $1,076 $1,077
====== ====== ======
10. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under noncancelable
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, 1996, future minimum rental payments under existing
leases were as follows (in thousands):
Year ending June 30:
1997............................. $ 8,845
1998............................. 6,377
1999............................. 3,857
2000............................. 2,062
2001............................. 1,147
Thereafter....................... 558
-------
$22,846
=======
41
Rent expense was $7,773,000, $5,929,000, and $4,789,000 in the years ended June
30, 1996, 1995 and 1994, 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.
11. EARNINGS PER SHARE
Earnings per common and common equivalent share were computed based on the
weighted average number of common shares outstanding during the year. Earnings
per common and common equivalent share were computed as follows:
YEAR ENDED JUNE 30,
-------------------------------------
1996 1995 1994
---------- ----------- ----------
(In thousands, except per share data)
Earnings per share before cumulative
effect of change in accounting
principle:
Income before cumulative effect of
change in accounting principle $ 3,326 $ 1,990 $ 2,161
Earnings per share before cumulative
effect of change in accounting
principle $ .78 $ .48 $ .52
======== ======== ========
Earnings per share:
Net income $ 3,326 $ 1,990 $ 2,249
Earnings per share $ .78 $ .48 $ .54
======== ======== ========
Weighted average number of common
shares outstanding 4,253 4,157 4,162
======== ======== ========
12. 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. No matching of employee contributions by the Company has been
authorized by the Board of Directors.
42
13. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the fiscal years ended June 30, 1996,
1995 and 1994 are as follows:
($ in thousands, except per share amounts)
THREE MONTHS ENDED YEAR ENDED
------------------------------------------------ ----------
SEPT 30 DEC 31 MAR 31 JUNE 30 JUNE 30
---------- ------------ ----------- --------- ----------
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 .04 .05 .45 .24 .78
1995:
Revenues $10,155 $10,752 $13,124 $13,759 $47,790
Net income 84 158 865 883 1,990
Earnings per share .02 .04 .21 .21 .48
1994:
Revenues $ 8,271 $ 9,038 $12,414 $10,179 $39,902
Income before cumulative effect of
change in accounting principle 24 202 1,569 366 2,161
Net income 112 202 1,569 366 2,249
Earnings per share before cumulative
effect of change in accounting
principle .01 .05 .38 .09 .52
Earnings per share .03 .05 .38 .09 .54
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.
14. SUBSEQUENT EVENTS
In August, 1996, the Company signed a letter of intent with an independent
third party to sell its entire interest in its auto loan portfolio (i.e.
substantially all of the assets of Check Express Finance, Inc., a subsidiary of
Check Express, Inc.) for a calculated amount based on the gross amount of loans
outstanding at the closing date. The proceeds to the Company are anticipated to
approximate the carrying value on the Company's financial statements at the
closing date. No gain or loss will be recognized on the sale since this auto
loan portfolio was substantially all acquired in connection with the February 1,
1996, acquisition of Check Express, Inc. A portion of the proceeds from the sale
of the auto loans will be used to fully repay long-term debt collateralized by
the loans.
As of September 6, 1996, 39 former Check Express franchised stores have
exercised an option to convert to ACE franchises and 56 stores have elected to
remain under existing agreements. Owners of 51 stores have elected to buy out
their agreements under a program offered by the Company. Through September 6,
1996, ACE has received payment totaling $1,275,000 under these buyout
arrangements. The receipt of these buyout payments, less related tax effects of
$497,000, has been reflected as part of the initial purchase accounting of the
Check Express acquisition and, consequently, no gain on these payments was
recognized.
43