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<SEC-DOCUMENT>0000849116-98-000013.txt : 19980928
<SEC-HEADER>0000849116-98-000013.hdr.sgml : 19980928
ACCESSION NUMBER: 0000849116-98-000013
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19980630
FILED AS OF DATE: 19980925
SROS: NASD
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ACE CASH EXPRESS INC/TX
CENTRAL INDEX KEY: 0000849116
STANDARD INDUSTRIAL CLASSIFICATION: FUNCTIONS RELATED TO DEPOSITORY BANKING, NEC [6099]
IRS NUMBER: 752142963
STATE OF INCORPORATION: TX
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 000-20774
FILM NUMBER: 98714909
BUSINESS ADDRESS:
STREET 1: 1231 GREENWAY DR STE 800
CITY: IRVING
STATE: TX
ZIP: 75038
BUSINESS PHONE: 2145505000
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<TEXT>
<PAGE>
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, 1998
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 (IRS Employer Identification No.)
of incorporation or organization)
1231 GREENWAY DRIVE, SUITE 800
IRVING, TEXAS 75038
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (972)550-5000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- -------------------
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
As of September 15, 1998, 9,934,906 shares of Common Stock were outstanding.
As of such date the aggregate market value of voting stock (based upon the last
reported sales price in The Nasdaq Stock Market) held by nonaffiliates of the
registrant was approximately $88,079,720.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference from the
registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Ace Cash Express, Inc. ("ACE" or the "Company") is a significant provider
of retail financial services in the United States. The Company is also the
largest owner and operator, and one of the largest franchisers of check cashing
stores in the United States. As of August 31, 1998, the Company has a total
network of 795 stores in 29 states, including 702 Company-owned stores and 93
franchised stores. The Company's growth strategy is to integrate acquisitions,
new store openings and franchising in new and existing markets and to develop
new products for introduction into the existing store base. The Company's
general objective is to provide a full range of retail financial services and
transaction processing in its markets. Additionally, it is the Company's
objective to develop and maintain the largest network of stores in markets
where the Company operates.
ACE 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 money orders;
and providing money transfer services using the MoneyGram network. Many
Company-owned stores also offer bill payment services, lottery and lotto
tickets, small consumer loans and other retail financial and transaction
processing services.
INDUSTRY OVERVIEW
The primary industry in which ACE operates is check cashing. Industry
sources indicate that there are approximately 7,000 check cashing stores
nationally. While there is limited public information available, the Company
believes that there are four 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 have
grown by offering services that banks do not fully provide, at locations and
during hours that are more convenient than those traditionally offered by
banks. Unlike many banks, check cashing stores are willing to assume the risk
that checks they cash will "bounce." For instance, it is not unusual for a
bank to refuse to cash a check for a customer who does not maintain a deposit
account with the bank and to require its depositors to maintain sufficient
funds in an account to cover a check to be cashed or wait several days for the
check to clear. As a result, the Company believes check cashing stores provide
an attractive alternative to customers without bank accounts or with relatively
small account balances. Although these customers might save money by
depositing their checks in a bank and waiting for them to clear, many prefer
paying a fee to take advantage of the convenience and availability of immediate
cash offered by check cashing stores.
The core business of check cashing stores is generally cashing checks for a
fee. These fees are intended to provide the check casher with a profit after
covering operating expenses, including any interest expense incurred by the
check casher on the funds advanced to customers between the time checks are
cashed and the time the checks clear through the banking system. The risk a
check cashing store assumes upon cashing a check is that the check will be
uncollected because of insufficient funds, stop payment orders or fraud. In
order to minimize this risk and the losses associated with uncollected checks,
many check cashing stores cash only payroll or government entitlement checks,
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, 1998, 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 small consumer loans, bill
payments, money orders and wire transfers of cash. Some check cashing stores
also offer lottery and lotto tickets, public transportation passes, copying and
fax transmission services, and postage stamps.
2
<PAGE>
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-income and middle-income
customers. At the same time, the Company believes that competition, regulatory
scrutiny and complexity are contributing to consolidation of the industry. The
Company's strategy is to position itself to benefit from industry consolidation
and the competitive advantages available to large operators and franchisers of
retail financial services.
GROWTH STRATEGY
ACE's growth strategy consists principally of combining acquisitions and
new store openings with the objective to have the largest number of retail
financial services locations in each of its markets. Prior to June 30, 1994,
ACE generally limited its markets to major metropolitan areas with a minimum
population of 500,000. ACE now defines its target markets as cities of 100,000
or more. The Company has expanded from 220 Company-owned stores in ten
metropolitan areas as of June 30, 1992, to 683 Company-owned stores in 47
market areas as of June 30, 1998. In fiscal 1998, the Company opened 62 stores,
acquired 15 stores, and closed 11 stores. The Company currently anticipates
that it will open 90 new stores, primarily in existing markets, during the
fiscal year ending June 30, 1999.
3
<PAGE>
The following table illustrates the development of Company-owned stores
since 1992 by showing the number of stores open in each market area at the end
of each of the indicated periods:
<TABLE>
<CAPTION>
COMPANY-OWNED STORES
------------------------------------------------------
JUNE 30,
------------------------------------------------------
MARKET AREA 1998 1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
TEXAS:
Dallas/Fort Worth/East Texas 117 114 112 103 98 91 83
Houston/Galveston 76 74 72 60 55 50 40
San Antonio/Austin/El Paso 51 42 28 24 23 20 18
MARYLAND/WASHINGTON, D.C./VIRGINIA:
Baltimore/Washington, D.C.
Northern VA/Norfolk/Virginia Beach 77 72 74 71 62 49 35
FLORIDA:
Jacksonville/Orlando/Palm Beach/Tampa 60 46 38 - - - -
ARIZONA:
Phoenix/Tucson 59 58 46 37 4 5 3
GEORGIA:
Atlanta/Albany/Augusta/Macon/
Savannah 50 47 47 49 42 15 2
COLORADO:
Denver 32 31 28 27 21 23 23
Colorado Springs/Pueblo 13 13 13 12 9 9 9
LOUISIANA:
New Orleans/Baton Rouge/Shreveport 25 25 19 19 14 14 7
TENNESSEE:
Memphis/Nashville 18 15 5 2 - - -
NORTH & SOUTH CAROLINA:
Charlotte/Charleston/Columbia/
Greenville/Spartanburg/Orangeburg 17 16 16 15 11 - -
INDIANA:
Indianapolis 14 9 4 - - - -
OKLAHOMA:
Oklahoma City 13 13 12 12 - - -
OHIO:
Cleveland 10 10 8 7 4 - -
WASHINGTON:
Seattle/Tacoma/Everette 10 8 6 - - - -
CALIFORNIA:
Los Angeles/Ontario/San Bernadino 9 - - - - - -
NEW MEXICO:
Albuquerque 7 7 7 7 - - -
ARKANSAS:
Little Rock 7 6 6 4 - - -
MISSOURI:
St. Louis 6 6 3 3 - - -
OREGON:
Portland 5 5 - - - - -
NEVADA:
Las Vegas 4 - - - - - -
KANSAS:
Wichita 2 - - - - - -
ALABAMA:
Homewood 1 - - - - - -
---- ---- ---- ---- ---- ---- ----
TOTAL 683 617 544 452 343 276 220
==== ==== ==== ==== ==== ==== ====
</TABLE>
4
<PAGE>
During fiscal 1998, the Company acquired 15 stores in six separate
transactions. The Company believes its experience with acquisitions permits it
to successfully integrate additional acquisitions. The Company currently
intends to continue searching for strategic opportunities in both existing and
new markets. Since 1992, the Company has acquired 255 stores in 61 separate
transactions.
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 franchisers of check cashing stores in the United States. In fiscal
1996, ACE created the ACE Franchise Group, to service and market new ACE
franchises. ACE franchises are being marketed through a commissioned sales
force, supplemented by advertising in newspapers, trade journals, and other
media. As of June 30, 1998, there were 89 Company-franchised stores open and
operating in 21 states, located as follows:
<TABLE>
<CAPTION>
Number of stores
-----------------
<S> <C>
Texas 23
California 12
Louisiana 10
Florida 7
Georgia 7
Washington 5
North Carolina 4
Oregon 3
Arkansas 2
Indiana 2
Ohio 2
South Carolina 2
Tennessee 2
Other states (8) 8
--
Total 89
==
</TABLE>
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 franchises
depending on the style of business being conducted. These include a standard
store franchise, a store-within-a-store (or "kiosk") franchise, and a
conversion franchise that permits an existing check cashing business to convert
to an ACE franchisee. The Company sold 20 franchise stores, opened 41 new
franchise stores, and acquired five former franchise stores during fiscal 1998.
The majority of franchises operate under the "ACE" name.
CUSTOMERS AND SERVICES
Management believes the Company's core customer group is comprised
primarily of individuals whose average age is 34 and who rent their house or
apartment and hold a wide variety of jobs in the service sector or are clerical
workers, craftsmen and laborers. These customers tend to change jobs and
residences more often than average, have annual family incomes under $35,000,
often pay their bills with money orders and prefer the availability of
immediate cash provided by cashing checks at the Company's stores.
5
<PAGE>
The following table reflects the major categories of services that ACE
currently offers and the revenues (in thousands) from these services for the
indicated fiscal years:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
- ---------------- -----------------------------------------------------
REVENUE CATEGORY 1998 1997 1996 1995 1994
- ---------------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Check cashing $ 68,987 $ 62,835 $ 51,327 $ 37,488 $ 31,828
Loan fees and interest 10,137 5,703 2,462 597 164
Money transfer services 6,082 5,749 4,740 1,775 1,155
Bill payment services 4,146 2,197 1,320 819 425
Money orders 2,879 2,757 2,413 2,089 1,800
New customer fees 2,207 2,051 1,338 806 504
Franchise revenues 1,665 1,398 633 - -
Other fees 4,091 4,702 4,726 4,216 4,026
-------- -------- -------- -------- --------
Total revenue $100,194 $ 87,392 $ 68,959 $ 47,790 $ 39,902
======== ======== ======== ======== ========
</TABLE>
Check cashing. ACE's primary business is cashing checks for a fee. The
principal type of check the Company cashes is a payroll check. The Company
also cashes government assistance, tax refund checks and insurance checks or
drafts. In order to control the risk of loss, the Company normally does not
cash two-party personal checks. Subject to market conditions at different
locations, the Company's check cashing fees for payroll checks approximate 2.2%
of the face amount of the check. The Company imposes a surcharge 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."
Loan fees and interest. The Company is engaged in the small consumer loan
business, offering short-term loans to individuals. Company management
believes much of its existing base of check cashing and other customers may
have limited access to other sources of consumer credit.
ACE is a licensed provider of small consumer loans in Arkansas, California,
Colorado, Florida, Indiana, Kansas, Kentucky, Louisiana, Maine, Missouri,
Nevada, New Mexico, North Carolina, Oklahoma, Ohio, Oregon, Tennessee, Texas,
Washington, and Washington D.C. Where permitted by law, the Company offers a
standardized, single installment loan ranging from $50 to $580 (averaging $177)
through its post-dated check product. Through this product, ACE permits a
customer to receive a cash advance for a fee, secured by a post-dated personal
check. Such a loan generally has a term of two to four weeks. As of August 31,
1998, this product was offered in 257 of the Company's stores. On a test basis,
ACE also currently offers multiple installment loans up to $450 in an
additional 52 stores in Texas and up to $660 in an additional 13 stores in
Oklahoma.
Small consumer loan products are offered in a highly structured regulatory
environment. Each ACE store which offers consumer loans is individually
licensed under state laws, which establish allowable interest rates, 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 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 approximately 15,000
MoneyGram locations nationwide (including other ACE stores) and over 25,000
Locations worldwide (number of locations as of July 31, 1998). MoneyGram
Payment Systems, Inc. (the "MoneyGram
6
<PAGE>
Supplier") establishes the fees for this service, and the Company is paid a
percentage of the fees it collects from customers as a commission and remits
the balance to the MoneyGram Supplier.
Bill payment services. The Company's stores serve as payment locations for
customers to pay their utility, telephone, and other bills to third parties.
Upon acceptance of the customer's payment, the Company remits the amount owed
to the third-party payee under an agreement with that payee, and either retains
a service fee or collects a fee from the consumer.
In April 1998, the Company entered into a Bill Payment Processing and Funds
Transfer Services Agreement (the "MoneyLine Agreement") with Travelers Express
Company, Inc. and its affiliate MoneyLine Express, Inc. ("MoneyLine"). Under
the MoneyLine Agreement, which the Company expects to be implemented in the
second quarter of fiscal 1999, the Company will be an agent for MoneyLine,
which has agreements with various third-party payees for consumer services.
The Company's services and obligations under the MoneyLine Agreement are
similar to those in its other bill-payment agreements directly with the payees,
with consumer payments accepted by the Company being transmitted to MoneyLine
instead of directly to the payees. The Company expects that the MoneyLine
Agreement will permit the Company to offer its customers bill-payment services
regarding a significantly larger group of payees.
Money orders. The Company sells 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 14.1
million, 13.6 million and 11.8 million money orders during the 1998, 1997, and
1996 fiscal years, respectively. The face amount of money orders sold as a
percentage of the face amount of checks cashed was 63.8% in 1998, 69.1% in 1997
and 71.4% in 1996. 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.
New customer fees. The Company charges a one-time fee for new check cashing
customers to cover the costs of the initial set-up in the ACE customer database
and identification verification.
Franchise revenues. The Company's franchise revenues consist of royalties,
initial franchise fees and buyback fees from its franchisees. There were 89
Company-franchised stores in operation as of June 30, 1998.
Other services and products. In some Company-owned stores, ACE also offers
a variety of other retail financial products and services to its customers,
including lottery and lotto ticket sales, food stamp distribution, public
transportation passes, copying and fax transmission services and postage
stamps, prepaid local telephone service, and prepaid long-distance telephone
cards.
STORE OPERATIONS AND NEW STORE ECONOMICS
The Company's objective is to locate its owned stores in highly visible and
accessible locations and to operate them during convenient hours. The Company
attempts to locate stores on high traffic streets or intersections, in many
cases in or near destination shopping centers. The Company's stores occupy
1,100 square feet on average and are located in strip shopping centers,
free-standing buildings and kiosks located inside major retail stores (for
example, Wal-Mart Super Stores). The Company is focused on increasing the
market's awareness of ACE by using consistent signage and design at each store
location. All but one of the locations of the Company-owned stores are leased.
Normal business hours of the Company-owned stores are from 9:00 a.m. until
7:00 p.m., Monday through Thursday, 9:00 a.m. until 8:00 p.m. on Friday and
9:00 a.m. until 6:00 p.m. on Saturday. Currently, 138 stores are also open on
Sunday, generally from 10:00 a.m. until 5:00 p.m., and several stores are open
24 hours. The business hours of any store may be changed due to local market
conditions.
7
<PAGE>
The Company's store construction and facilities planning staff supervises
the construction of new stores and the remodeling of existing stores, and
performs lease management. Although the size and shape of a Company-owned store
may vary, since many of the stores are built out of existing space, the work
area of each store is a modular-designed unit that can be customized to meet
the requirements of each location while giving a uniform appearance. These
modular units may be moved from one location to the next, thus reducing the
costs associated with opening new stores and relocating existing stores.
The tables below show the average annual store revenues and the average store
contribution for Company-owned stores that have remained open since June 30,
1988, and for stores that have been opened and have remained open since that
date.
<TABLE>
<CAPTION>
AVERAGE STORE REVENUES
YEAR ENDED JUNE 30,
NUMBER OF ($ in thousands)
STORES OPEN AT ------------------------------------------
YEAR OPENED: JUNE 30, 1998 1998 1997 1996 1995 1994
-------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
1989 and earlier 101 $169.1 $161.2 $155.2 $150.2 $151.7
1990 29 149.1 141.1 134.1 134.9 138.2
1991 16 155.5 150.2 137.1 132.2 129.8
1992 22 199.1 175.4 152.1 143.2 137.0
1993 38 156.5 141.8 126.8 115.5 97.7
1994 38 140.8 127.7 108.8 88.1 33.9
1995 37 119.5 108.1 81.8 26.9 -
1996 32 135.5 106.5 32.2 - -
1997 45 101.2 33.4 - - -
1998 61 23.5 - - - -
-----------
419
Acquired stores 264
-----------
683
</TABLE>
<TABLE>
<CAPTION>
AVERAGE STORE CONTRIBUTION (1)
YEAR ENDED JUNE 30,
NUMBER OF ($ in thousands)
STORES OPEN AT -----------------------------------------
YEAR OPENED: JUNE 30, 1998 1998 1997 1996 1995 1994
--------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
1989 and earlier 101 $69.3 $63.3 $59.6 $55.7 $58.6
1990 29 55.6 45.4 41.0 38.5 42.5
1991 16 55.8 52.0 43.4 41.8 41.2
1992 22 89.7 69.8 52.7 43.7 40.5
1993 38 57.7 46.8 37.4 26.5 14.8
1994 38 43.0 40.2 24.4 6.9 (8.1)
1995 37 21.9 17.3 (2.0) (13.7) -
1996 32 34.1 9.8 (7.9) - -
1997 45 0.5 (13.5) - - -
1998 61 (13.6) - - - -
-----------
419
Acquired stores 264
-----------
683
</TABLE>
(1) "Average 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 1998, the Company opened 62 Company-owned stores
at an average capital cost of approximately $50,000 per store.
8
<PAGE>
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 markets and promotes service offerings by a variety of methods. The
Company believes that its most effective marketing is through in-store
programs, combining the selling efforts of store personnel with various selling
messages on point-of-purchase material. The Company emphasizes courteous
service and trains service associates to recognize and develop good
relationships with customers. Every check cashing customer is encouraged to
join the ACE PLUS gold card retention program which rewards members with
benefits like free check cashing commensurate with the volume of check cashing
done at ACE. Also, through its standard signage and store design, the Company
attempts to foster an image that attracts customers and inspires consumer
confidence. The company also benefits from vendor-sponsored media advertising
in some markets.
SUPERVISION AND TRAINING
The Company's operations are organized in two "divisions" - East and West.
Within each division, the Company is organized in "regions," which generally
correspond to the market areas in which ACE operates its stores. Each region
has a regional vice president ("RVP"), who reports to one of two division vice
presidents and is responsible for the operations, administration, training and
supervision of the Company-owned stores in his or her region. The Company
currently has 10 RVP's who supervise an average of 70 stores each. The Company
currently has 47 district supervisors, each of whom reports to the RVP for his
or her region and is directly responsible for the general management of 6 to 30
stores within his or her territory. These district supervisors are responsible
for operations, training, scheduling, marketing and staff motivation. Each
store manager reports to a district supervisor, has direct responsibility over
his or her store's operations and supervises the service associates who staff
the stores.
Service associates, managers, district supervisors and RVP's must complete
formal training programs conducted by the Company. ACE has a uniform,
Company-wide training program, with higher-level training conducted at the
corporate office and new-hire training conducted in each regional office by
corporate-trained personnel. The purpose of this training, which covers topics
ranging from customer service to loss reduction, is to improve the Company's
delivery of products and services.
POINT-OF-SALE SYSTEM
ACE has developed and implemented a proprietary personal computer based
point-of-sale system, which has been fully operational in all Company-owned
stores since 1991. In addition to other management information and control
functions, ACE's point-of-sale system allows the Company to:
1) capture, analyze and update on a daily basis data relating to customers and
transactions, including the makers of cashed checks, which allows the Company
to provide service associates with on-demand access to current information for
use in approving check cashing transactions;
2) utilize an automated decision methodology to guide service associates to
take appropriate actions to manage risk in check cashing transactions;
3) monitor daily revenues by product or service on a Company, divisional,
regional, per store or per employee basis;
4) monitor and manage daily store exception reports, which record, for example,
any cash shortages and late store opening times;
5) identify cash differences between bank statements and the Company's records
(such as differences resulting from missing items and deposits);
9
<PAGE>
6) determine, on a daily basis, the amount of cash needed at each store
location, allowing centralized cash management personnel to maintain the
optimum amount of cash inventory in each store;
7) reduce the risk of transaction errors by, for example, automatically
calculating check cashing and other transaction fees;
8) provide products and services in a standardized and efficient manner, which
the Company believes allows it to operate its stores with fewer personnel than
many of its competitors (with many of the Company's stores being operated by
only one person); and
9) facilitate compliance with regulatory requirements.
The data captured by the point-of-sale system is transmitted daily from each
store to a centralized database maintained at ACE's headquarters and is
automatically integrated into its general ledger system.
SECURITY
All Company-owned store employees work behind bullet-resistant Plexiglas
and steel partitions. Each Company-owned store's security measures include
safes, alarm systems monitored by third parties, teller area entry control,
perimeter opening entry detection, and tracking of all employee movement in and
out of secured areas. In addition, as security contracts expire and new stores
are opened, the Company is centralizing its security measures to strengthen and
improve control over physical security. As of August 31, 1998, 94% of the
Company's stores have been integrated into the centralized security system.
The centralized system includes the following security measures in addition to
those described above: identical alarm systems in all stores, remote control
over alarm systems, arming/disarming and changing user codes, and mechanically
and electronically controlled time-delay safes.
Since ACE's business requires it to maintain a significant supply of cash
in its stores, the Company is subject to the risk of cash shortages resulting
from theft and employee errors. Although the Company has implemented various
programs to reduce these risks and provide security for its facilities and
employees, there can be no assurance that these problems will be eliminated.
During the 1998 and 1997 fiscal years, cash shortages from employee errors and
from theft were approximately $1,871,000 (1.9% of revenues) and $1,762,000
(2.0% of revenues), respectively.
The Company's point-of-sale system allows management to detect cash
shortages on a daily basis. In addition to other procedures, district
supervisors conduct random audits of each Company-owned store's cash position
and inventories on an unannounced random basis.
Daily transportation of currency and checks is provided by nationally
recognized armored carriers, such as Loomis, Fargo & Company. ACE employees
are not authorized to transport currency or checks.
EMPLOYEES
At June 30, 1998, ACE employed 1,679 persons: 796 store employees, 642
store managers, 47 district supervisors, 10 regional vice presidents, 104
regional support personnel, 71 corporate employees, and 9 franchise personnel.
Third-party firms hired by the Company conduct background checks of the
Company's new hires.
The Company considers its employee relations to be good. ACE's employees
are not covered by a collective bargaining agreement, and the Company has never
experienced any organized work stoppage, strike or labor dispute. Generally,
the Company's employees are not bonded.
COMPETITION
The Company believes that the principal competitive factors in the check
cashing industry are locations, customer service, fees, convenience and
products and services offered. The Company faces intense competition
10
<PAGE>
and believes that the check cashing market will become more competitive as the
industry matures. The Company competes with other check cashing stores, grocery
stores, banks, savings and loans and other financial services entities and any
retail businesses that cash checks, sell money orders or provide money transfer
services or other products and services offered by the Company. Certain
competitors of the Company, other than check cashing stores, cash checks
without charging a fee under limited circumstances. Some of the Company's
competitors that are not check cashing companies have larger and more
established customer bases and substantially greater financial, marketing and
other resources than the Company. There is no assurance that the Company will
be able to compete successfully with its competitors.
TRADEMARKS
The Company has obtained the federal trademark registration of "A-C-E
America's Cash Express (REGISTERED TRADEMARK)", and the federal trademark
registration of its logo.
REGULATION
General. The Company is subject to regulation in several jurisdictions in
which it operates, including jurisdictions that regulate check cashing fees,
require prompt remittance of money order proceeds to money order suppliers or
require the registration of check cashing companies or money transmission
agents. The Company is also subject to regulation in jurisdictions where it
offers small consumer loans. In addition, ACE is subject to federal and state
regulation relating to the reporting and recording of certain currency
transactions.
State Regulations. The Company operates in 19 states that 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, South Carolina,
Tennessee, Washington and Wisconsin. The Company is licensed in each of the
states in which a license is currently required for it to operate as a
check-cashing company. The ceilings on fees adopted by Georgia, South
Carolina, Tennessee, and Ohio -- the only states that regulate such fees in
which the Company operated as of June 30, 1998 -- are in excess of the fees
charged by the Company. The fee ceilings in effect in certain states (Delaware,
New Jersey and New York, for example) currently make operations in those states
less attractive to the Company.
As of June 30, 1998, the Company operated a total of 102 stores in four
states - Georgia, Maryland, California, and Nevada -- that have so-called
"prompt remittance" statutes. These statutes specify a maximum time for the
payment of proceeds from the sale of money orders to the issuer of the money
order. See "Business - Relationships with the Money Order Supplier and
MoneyGram Supplier." In addition, in some jurisdictions, check cashing
companies or money transmission agents are required to meet minimum bonding or
capital requirements and are subject to record-keeping requirements.
The adoption of check cashing fee ceilings and prompt remittance statutes
in additional jurisdictions could have an adverse effect on the Company's
business, and existing fee ceilings and prompt remittance statutes could
restrict the ability of the Company to expand its operations into certain
states. Upon commencement of the Company's new Credit Facilities, prompt
remittance statutes should not restrict the ability of the Company to expand
its operations into any states.
Federal Regulation. Under the Bank Secrecy Act regulations of the U.S.
Department of the Treasury (the "Treasury Department"), transactions involving
currency in an amount greater than $10,000 or the purchase of monetary
instruments for cash in amounts from $3,000 to $10,000 must be recorded. In
general, every financial institution, including the Company, must report each
deposit, withdrawal, exchange of currency or other payment or transfer, whether
by, through or to the financial institution, that involves currency in an
amount greater than $10,000. In addition, multiple currency transactions must
be treated as single transactions if the financial institution has knowledge
that the transactions are by, or on behalf of, any person and result in either
cash in or cash out totaling more than $10,000 during any one business day.
Management believes that the Company's
11
<PAGE>
point-of-sale system and employee training programs are essential to the
Company in complying with these statutory requirements and may give the Company
a competitive advantage.
In September 1994, the United States Congress passed the Money Laundering
Suppression Act of 1994, which, among other things, contemplated the
registration of "money services businesses," which includes check cashers like
the Company, with the Treasury Department. That registration requirement has
been suspended, however, until 90 days after the effective date of regulations
implementing that act. In 1997, the Financial Crimes Enforcement Network of
the Treasury Department ("FinCEN") proposed implementing regulations for
comment. Representatives of the Company have reviewed those proposed
regulations and communicated their comments to a national check cashers trade
association that has had contact with representatives of FinCEN. Though the
registration requirements that are finally adopted may differ from those that
have been proposed, management of the Company does not believe that compliance
with the proposed requirements would have any material impact on the Company's
operations.
In 1997, FinCEN also proposed for comment two additional sets of
regulations implementing the Bank Secrecy Act that could affect the Company.
One of those proposed sets of resolutions requires "money transmitters" and
their "agents" to report and keep records, and verify the senders, of
transactions in currency or monetary instruments of at least $750, but not more
than $10,000, in connection with the transfer of funds to a person outside the
United States. As a member of the MoneyGram system, the Company would be an
agent of a money transmitter for this set of regulations. The second proposed
set of regulations would require businesses issuing, selling, or redeeming
money orders or travelers' checks, like the Company, to report suspicious
transactions to the Treasury Department. Representatives of the Company have
also reviewed and communicated comments on these two sets of proposed
regulations. Although the regulations that are finally adopted may differ from
those that have been proposed, management believes that the Company's point-of-
sale system would enable the Company to comply with the regulations and that
the principal effect of the regulations would be a greater emphasis in the
Company's training programs on money transmission reporting and identification
of suspicious transactions.
RELATIONSHIPS WITH THE MONEY ORDER SUPPLIER AND MONEYGRAM SUPPLIER
Money Orders. Most of the Company's funds for the operation of its check
cashing business, ACE's primary business, are currently derived from the sale
of money orders issued by Integrated Payment Systems, Inc. (the "Money Order
Supplier" or "IPS") 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,
12
<PAGE>
including when cashing checks. The period within which the Company must remit
the Money Order Proceeds to the Money Order Supplier varies depending on
whether the store is located in a jurisdiction with a statute that specifies a
maximum time period for the payment of money order proceeds to the issuer of
the money order (a "prompt remittance jurisdiction") or is located in a
jurisdiction in which there is no specified maximum period for the payment of
money order proceeds to the issuer of the money order (a "non-prompt remittance
jurisdiction"). The Money Order Agreement provides for a smaller Money Order
Fee for money orders sold in prompt remittance jurisdictions than in non-prompt
remittance jurisdictions.
The Money Order Agreement contains certain restrictive covenants affecting
the Company, and the Company's obligations under the Money Order Agreement are
secured by liens on all its assets, in accordance with the Collateral Trust
Agreement described below under "--Arrangements Regarding Secured Notes." 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. In addition, such
requirement might have a material adverse effect on the Company's liquidity,
expansion program and operating results. 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) 10%
of cumulative earnings of the Company after August 30, 1992 up to $1.0 million
annually; the payment of any dividend may not cause a default under any other
covenant in the Money Order Agreement.
The Money Order Agreement will expire on December 31, 1998, but may be
terminated by the Money Order Supplier before that date for several reasons,
including (i) upon a change of control of the Company, (ii) after a default by
the Company that is not cured, (iii) after 180 days' notice, if a court or
regulatory authority determines that it is unlawful for the Money Order
Supplier to participate in the Money Order Agreement or if any material
provision of the Money Order Agreement is determined to have a potential
material adverse financial or tax consequence to the Money Order Supplier or
(iv) upon a reasonable determination by the Money Order Supplier that there has
been a material adverse change in the financial condition of the Company.
New Money Order Agreement. In April 1998, the Company signed a new money
order agreement with Travelers Express Company, Inc. ("Travelers Express"), to
become effective January 1, 1999, upon the expiration of the existing Money
Order Agreement. Under the new five-year agreement, the Company will
exclusively sell Travelers Express money orders that bear the Company's logo.
The Company also signed a five-year agreement with an affiliate of Travelers
Express to offer additional bill-payment services to the Company's customers.
In conjunction with these two agreements, the Company received $3 million from
Travelers Express in April 1998 and is entitled to receive an additional
$400,000 per year for the next five years.
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. If the new money order agreement is
terminated under certain circumstances before the expiration of its five-year
term, the Company will be obligated to repay a portion of the $3 million and
annual amounts received from Travelers Express. The new money order agreement
with Travelers Express does not contemplate an extended deferral of remittances
of money order proceeds or financing for the Company's check-cashing
operations, capital expenditures, or expansion. Upon the effectiveness of the
new money order agreement, the Company expects to obtain financing through its
new credit facility with a syndicate of banks. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - New Credit Facilities." The Company's payment and other
obligations to Travelers Express under the new money order agreement will be
secured by a subordinated lien on the Company's assets in accordance with the
Collateral Trust Agreement described below under "-- Arrangements Regarding
Secured Notes."
13
<PAGE>
MoneyGram Services. The Company is also an agent for the receipt and
transmission of wire transfers through the MoneyGram network, in accordance
with the 1996 MoneyGram Master Agreement, as amended (the "MoneyGram
Agreement"), with MoneyGram Payment Systems, Inc. (the "MoneyGram Supplier").
When the original Money Order Agreement was executed, the MoneyGram network
was owned by the Money Order Supplier. Therefore, the terms of the Company's
serving as a MoneyGram agent were originally part of the Money Order Agreement.
As of February 1, 1996, however, those terms were separated and stated in the
original MoneyGram Agreement. Thereafter, the Money Order Supplier assigned
its rights under the MoneyGram Agreement to the MoneyGram Supplier, which was
then an affiliate of the Money Order Supplier. Since July 1998, the MoneyGram
Supplier has been an affiliate of Travelers Express, with which the Company has
signed the new money order agreement, expected to be effective on January 1,
1999.
In June 1996, the original MoneyGram Agreement was amended to extend its
term until December 31, 2000. At the time of that amendment, the Company
received a bonus of $2 million. That bonus was deferred and included in other
liabilities in the Company's Consolidated Balance Sheets. The bonus is being
amortized to revenue on a straight-line basis over the five-year term of the
MoneyGram Agreement.
The MoneyGram Agreement also provides for incentives for opening new
MoneyGram service locations and other performance incentives for the Company.
During the year ended June 30, 1998, $1.4 million of amortization related to
other performance incentives was recorded and included in money transfer
services revenue.
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 money orders and be entitled to Term
Advances through 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 the Money Order
Supplier of the Company's ability to obtain Term Advances to fund the expansion
of its business, including the offering of the MoneyGram service, or (ii) the
Money Order Supplier will not use its knowledge of the operations of the
MoneyGram service to cause the Western Union service to be a more effective
competitor in the consumer money transfer services market.
ARRANGEMENTS REGARDING SECURED NOTES
In December 1996, the Company consummated a private placement of $20
million of its 9.03% Senior Secured Notes ("Notes") and issued the Notes to
Principal Life Insurance Company (formerly known as Principal Mutual Life
Insurance Company) ("Principal") under the terms of a Note Purchase Agreement
dated as of November 15, 1996 (the "Note Purchase Agreement"). The net
proceeds of the issuance of the Notes were used to pay in full the then
outstanding $18.5 million principal of the Term Advances from the Money Order
Supplier, plus all accrued interest thereon and fees in connection therewith,
and for general corporate purposes of the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Cash Flows from Financing Activities."
Interest on the unpaid principal amount of the Notes, accruing at 9.03% per
annum, is payable semiannually on May 15 and November 15 of each year,
commencing May 15, 1997. The principal amount of the Notes is payable in five
equal installments of $4 million on November 15 of each year, commencing
November 15, 1999. All principal and accrued interest is payable at the
scheduled maturity of the Notes on November 15, 2003.
The Company may prepay the Notes, at any time or from time to time, in the
principal amount of at least $1 million, plus accrued interest on the principal
amount being prepaid, plus an amount approximately equal to the discounted
present value of the return that the holders of the prepaid Notes would have
received if the
14
<PAGE>
prepayment were not made. Any prepayment will ratably reduce the amount of
each scheduled principal payment on the Notes due thereafter.
The Note Purchase Agreement contains certain restrictive covenants
affecting the business and affairs of the Company and its subsidiaries. Those
covenants address, among other things, the maintenance of specified financial
ratios, the incurrence and payment of other indebtedness, the disposition of
assets or of the ownership of any subsidiary of the Company, the grant or
existence of other liens on the assets of the Company and its subsidiaries, and
transactions between the Company or its subsidiaries and any of their
affiliates.
The Note Purchase Agreement also specifies events of default that could
result in the acceleration of the maturity of the Notes. Those events include
(a) any failure by the Company to pay any amount due under the Notes, (b) any
failure by the Company to comply with various covenants set forth in the Note
Purchase Agreement and ancillary documents, (c) any misrepresentation or breach
of warranty by the Company, (d) any failure by the Company or any of its
subsidiaries to pay, or perform its obligations under, any indebtedness for
borrowed money or under capital leases in excess of $1 million, including
obligations to the Money Order Supplier, (e) various events of bankruptcy or
insolvency of the Company or any of its subsidiaries, and (f) any final
judgment of any court in excess of $1 million against the Company or any of its
subsidiaries remaining in effect 30 days after the entry thereof.
The Company's obligations under the Notes, the Note Purchase Agreement, and
all ancillary documents entered into with Principal are secured by liens on all
of the assets of the Company. Concurrent with the Note Purchase Agreement, the
Company entered into a Collateral Trust Agreement dated as of November 15, 1996
(the "Collateral Trust Agreement"), with Wilmington Trust Company, as trustee
(the "Collateral Trustee"), and the Company's two secured lenders, Principal
and the Money Order Supplier. The Collateral Trust Agreement creates a
collateral trust to secure the Company's obligations to both of its existing
secured lenders and, under conditions set forth therein, any future secured
lenders to the Company. The Collateral Trust Agreement includes agreements
regarding the priority of distributions to the secured lenders upon foreclosure
and liquidation of the collateral subject thereto and certain other
intercreditor arrangements. Under the Collateral Trust Agreement, the Money
Order Supplier has priority with respect to deferred money order remittances,
and all secured lenders otherwise share in the collateral on a pro rata basis.
In connection with the Company's new Credit Agreement (as described below),
which is expected to be effective January 1, 1999, the Collateral Trust
Agreement was amended and restated to correspond to that new Credit Agreement.
The amended and restated agreement will be effective when that new Credit
Agreement is effective.
NEW CREDIT FACILITIES
In July 1998, the Company entered into a Credit Agreement with a syndicate
of banks (the "Lenders") represented by Wells Fargo Bank (Texas), National
Association ("Wells Fargo Bank"), as lead agent and Chase Bank of Texas as
co-agent (the "Credit Agreement"). The Credit Agreement provides for credit
facilities to the Company that are available only upon the expiration or
termination of the existing Money Order Agreement with the Money Order
Supplier, which is currently expected to be January 1, 1999. The contemplated
credit facilities consist of a revolving (line-of-credit) facility of $90
million (the "Revolving Facility") and a term-loan facility of $35 million (the
"Term-Loan Facility"). The Revolving Facility is to be used for working
capital and general corporate purposes of the Company, and the Term-Loan
Facility is to be used for store construction and relocation and other capital
expenditures of the Company, including acquisitions. Also, upon certain
conditions, in addition to the Revolving Facility, the Company will have
available from Wells Fargo Bank (i) an additional ten-day revolving advance
facility of up to $15 million and (ii) a standby letter-of-credit facility of
up to $1.5 million. The Revolving Facility will in effect replace the deferred
money order remittances and revolving advances now obtained and used by the
Company under the existing Money Order Agreement, and the Term-Loan Facility
will in effect replace the Term Advance facility under the existing Money Order
Agreement. The
15
<PAGE>
terms of the Credit Agreement and ancillary documents are described in more
detail at "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources -- New Credit
Facilities."
ITEM 2. PROPERTIES
All but one of the Company's stores are leased, generally under leases
providing for an initial term of three years and renewal terms of from three to
six years. The Company acquired, as part of the Check Express acquisition in
February 1996, and still owns the land and building at which one of the
Company's stores is located in Indianapolis, Indiana. Management believes that
the land and building are suitable for the successful operation of a Company-
owned store. The Company's headquarters offices in Irving, Texas, a suburb of
Dallas, occupy approximately 40,000 square feet under a 62-month lease, the
term of which expires in April 2001.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings incidental to the
conduct of its business. Management believes that none of these legal
proceedings will result in any material impact on the Company's financial
condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders of the Company
during the fourth quarter of fiscal 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on The Nasdaq Stock Market ("NASDAQ")
under the symbol "AACE". At September 11, 1998, there were approximately 2,200
holders of record of the Common Stock.
The following table sets forth the high and low sale prices of the Common
Stock as reported by NASDAQ for the past two fiscal years (as adjusted to
reflect the three-for-two stock split effected in the form of a 50% stock
dividend distributed to shareholders of record as of November 30, 1997):
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
Fiscal 1997
-----------
Quarter ended September 30, 1996 6-11/16 5-9/16
Quarter ended December 31, 1996 9-3/4 6-7/16
Quarter ended March 31, 1997 8-3/4 6-3/4
Quarter ended June 30, 1997 8-13/16 6-1/2
Fiscal 1998
-----------
Quarter ended September 30, 1997 13-3/4 8-1/4
Quarter ended December 31, 1997 14-5/16 10-3/16
Quarter ended March 31, 1998 16-5/16 9-1/2
Quarter ended June 30, 1998 19 13-3/4
</TABLE>
16
<PAGE>
On September 11, 1998, the last reported sale price of the Common Stock on
NASDAQ was $13.50 per share.
The Company has never paid dividends on the Common Stock and has no plans
to pay dividends in the foreseeable future. In addition, the Company's ability
to pay cash dividends is currently limited under the Money Order Agreement (see
"Business - Relationships with the Money Order Supplier and MoneyGram
Supplier") and will be limited under the Credit Agreement (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - New Credit Facilities").
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
($ in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $100,194 $ 87,392 $ 68,959 $ 47,790 $ 39,902
Store expenses 67,103 59,376 48,552 35,584 28,757
Region expenses 8,353 7,477 5,647 4,139 3,531
Headquarters expenses 7,198 6,106 4,744 3,651 3,392
Franchise expenses 965 1,046 458 - -
Other depreciation and amortization 3,502 3,024 2,152 1,219 1,032
Interest expense (income), net 2,437 2,271 1,714 103 (173)
Other expenses 49 213 236 28 125
-------- -------- -------- -------- --------
Income before income taxes and cumulative
effect of change in accounting principle 10,587 7,879 5,456 3,066 3,238
Income taxes 4,185 3,113 2,130 1,076 1,077
-------- -------- -------- -------- --------
Income before cumulative effect of change
in accounting principle 6,402 4,766 3,326 1,990 2,161
Cumulative effect of change in accounting
for income taxes - - - - 88
-------- -------- -------- -------- --------
Net income $ 6,402 $ 4,766 $ 3,326 $ 1,990 $ 2,249
======== ======== ======== ======== ========
Diluted earnings per share (1):
Earnings before cumulative effect of
change in accounting principle $ .63 $ .48 $ .35 $ .21 $ .23
Cumulative effect of change in
accounting for income taxes - - - - .01
-------- -------- -------- -------- --------
Earnings $ .63 $ .48 $ .35 $ .21 $ .24
======== ======== ======== ======== ========
Weighted average number of
shares (1)(2) 10,215 9,845 9,570 9,354 9,365
- -----------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Cash and cash equivalents $ 60,168 $ 55,494 $ 56,603 $ 49,249 $ 36,535
Total assets 134,635 124,350 114,684 87,544 59,378
Term advances 7,073 8,209 16,969 9,732 -
Indebtedness to money order supplier 49,418 48,447 56,645 48,710 34,390
Senior secured notes payable 20,226 20,231 - - -
Shareholders' equity 38,951 31,056 25,236 21,294 19,291
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) Prior years' diluted earnings per share and weighted average number of
common shares have been restated to reflect the three-for-two stock split
effected by a 50% stock dividend distributed to shareholders of record as
of November 30, 1997.
(2) Includes common shares and dilutive shares.
17
<PAGE>
SUPPLEMENTAL STATISTICAL DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
COMPANY-OWNED STORES IN OPERATION:
Beginning of year 617 544 452 343 276
Acquired 15 46 69 77 32
Opened 62 45 33 40 47
Closed (11) (18) (10) (8) (12)
------ ------ ------ ------ ------
End of year 683 617 544 452 343
====== ====== ====== ====== ======
Percentage increase in comparable store
revenues from prior year:
Exclusive of tax-related revenues (1) 8.0% 5.5% 4.1% 2.9% 1.3%
Total revenues (2) 6.9% 6.3% 4.7% 1.6% 1.0%
Capital expenditures (in thousands) $5,742 $4,868 $3,435 $4,187 $4,367
Cost of net assets acquired (in thousands) $4,708 $10,766 $14,432 $14,000 $4,846
- -----------------------------------------------------------------------------------------------
OPERATING DATA:
Face amount of checks cashed
(in millions) $2,898 $2,621 $2,144 $1,567 $1,309
Face amount of money orders sold
(in millions) $1,849 $1,812 $1,531 $1,213 $1,042
Face amount of money orders sold as a
percentage of the face amount of
checks cashed 63.8% 69.1% 71.4% 77.4% 79.6%
Face amount of average check $305 $291 $285 $284 $286
Average fee per check $7.26 $6.97 $6.81 $6.79 $6.94
Number of checks cashed (in thousands) 9,496 9,020 7,535 5,516 4,585
Number of money orders sold (in thousands) 14,146 13,608 11,835 9,334 8,266
- -----------------------------------------------------------------------------------------------
COLLECTIONS DATA:
Face amount of returned checks (in
thousands) $ 10,193 $ 10,399 $ 8,661 $ 6,206 $ 5,196
Collections (in thousands) 6,301 6,554 5,004 3,786 3,304
-------- -------- ------- -------- --------
Net write-offs (in thousands) $ 3,892 $ 3,845 $ 3,657 $ 2,420 $ 1,892
======== ======== ======= ======== =======
Collections as a percentage of
returned checks 61.8% 63.0% 57.8% 61.0% 63.6%
Net write-offs as a percentage of
revenues 3.9% 4.4% 5.3% 5.1% 4.7%
Net write-offs as a percentage of
the face amount of checks cashed .13% .15% .17% .15% .14%
____________________________________
(1) Change in revenues computed excluding electronic tax filing and tax refund check cashing
for the years compared.
(2) Calculated based on the changes in revenues of all stores open for the full years compared.
</TABLE>
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
REVENUE ANALYSIS
- -------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
---------------------------------------------------------------
($ IN THOUSANDS) (PERCENTAGE OF REVENUE)
1998 1997 1996 1998 1997 1996
--------- --------- --------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Check cashing fees $ 60,416 $ 54,529 $ 44,664 60.3% 62.4% 64.8%
Loan fees and interest 10,137 5,703 2,462 10.1 6.5 3.6
Tax check fees 8,571 8,306 6,663 8.5 9.5 9.7
Money transfer services 6,082 5,749 4,740 6.1 6.6 6.9
Bill payment services 4,146 2,197 1,320 4.1 2.5 1.9
Money order sales 2,879 2,757 2,413 2.9 3.2 3.5
New customer fees 2,207 2,051 1,338 2.2 2.3 1.9
Franchise revenues 1,665 1,398 633 1.7 1.6 0.9
Other fees 4,091 4,702 4,726 4.1 5.4 6.8
-------- --------- --------- ------ ------ ------
Total revenue $100,194 $ 87,392 $ 68,959 100.0% 100.0% 100.0%
======== ========= ========= ====== ====== ======
Average revenue per store $ 151.6 $ 148.1 $ 137.2
(excluding franchise revenues)
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997. Revenues increased $12.8 million, or 15%,
from $87.4 million in the year ended June 30, 1997, to $100.2 million in the
year ended June 30, 1998. This revenue growth resulted from a $5.3 million, or
6.9%, increase in comparable Company-owned store revenues (515 stores) and a
$7.5 million increase from stores which were opened or acquired after June 30,
1996, and were therefore not open for both of the full periods compared. The
number of Company-owned stores increased by 66, or 11%, from 617 stores open at
June 30, 1997, to 683 stores open at June 30, 1998. The increase in total check
cashing fees accounted for 48% of the total revenue increase, the increase in
loan fees and interest accounted for 35% of the total revenue increase, and the
increase in bill payment services accounted for 15% of the total revenue
increase.
Check cashing fees, including tax check fees, increased $6.2 million, or 10%,
from $62.8 million in fiscal 1997 to $69.0 million in fiscal 1998. This
increase resulted from a 5% increase in the total number of checks cashed and a
4% increase in the average fee per check due to the increase in the average
size check. Loan fees and interest increased $4.4 million, or 78%, to $10.1
million in fiscal 1998 as compared to $5.7 million in fiscal 1997. This
increase relates primarily to the increase in the number of stores offering the
Company's loan products to 299 stores in fiscal 1998 as compared to 189 in
fiscal 1997. Money transfer services revenues increased $0.3 million, or 6%,
principally as a result of acquired stores and related revenue guarantees. Bill
payment services revenues increased $1.9 million, or 89%, principally as a
result of new bill payment contracts.
During fiscal 1998, the Company sold 20 franchise stores, opened 41 new
franchise stores, and acquired five former franchise stores. Franchise
revenues consist of royalties, initial franchise fees, and buyback fees.
Franchise revenues increased $0.3 million, or 19%, from fiscal 1997 to fiscal
1998, due to the increase in the number of franchised stores.
Other fees decreased $0.6 million, or 13%, as a result of decreases in food
stamp distribution revenue and other miscellaneous product revenue.
FISCAL 1997 COMPARED TO FISCAL 1996. Revenues increased $18.4 million, or 27%,
from $69.0 million in the year ended June 30, 1996, to $87.4 million in the
year ended June 30, 1997. This revenue growth resulted from a $3.7 million, or
6.3%, increase in comparable Company-owned store revenues (421 stores) and a
$14.7 million increase from stores which were opened or acquired after June 30,
1995, and were therefore not open for both of the full periods compared. The
number of Company-owned stores increased by 73, or 13%, from 544 stores
19
<PAGE>
open at June 30, 1996, to 617 stores open at June 30, 1997. The increase in
total check cashing fees accounted for 62% of the total revenue increase.
Check cashing fees increased $11.5 million, or 22%, from $51.3 million in
fiscal 1996 to $62.8 million in fiscal 1997. This increase resulted from a 20%
increase in the total number of checks cashed. Loan fees and interest increased
$3.2 million, or 132%, to $5.7 million in fiscal 1997 as compared to $2.5
million in fiscal 1996. This increase relates primarily to the increase in the
number of stores offering the Company's loan products to 189 stores in fiscal
1997 as compared to 141 in fiscal 1996. Money transfer services revenues
increased $1.0 million, or 21%, principally as a result of acquired stores and
related revenue guarantees. Bill payment services revenues increased $0.9
million, or 66%, principally as a result of new contracts with utility
companies.
During fiscal 1997, the Company sold 34 franchise stores, acquired 20 former
franchise stores, and opened 26 franchise stores. Franchise revenues consist
of royalties, initial franchise fees, and buyback fees. Franchise revenues
increased $0.8 million from fiscal 1996 to fiscal 1997, because fiscal 1996
includes only five months of revenue (subsequent to the acquisition of Check
Express, Inc. on February 1, 1996), while fiscal 1997 includes revenues for 12
months.
<TABLE>
<CAPTION>
STORE EXPENSE ANALYSIS
- -------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
---------------------------------------------------------------
($ IN THOUSANDS) (PERCENTAGE OF REVENUE)
1998 1997 1996 1998 1997 1996
--------- --------- --------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Salaries and benefits $ 27,975 $ 24,844 $ 20,786 27.9% 28.4% 30.1%
Occupancy 15,204 13,728 11,284 15.2 15.7 16.4
Armored and security 4,200 3,480 2,926 4.2 4.0 4.2
Returns and cash shorts 6,057 5,961 5,472 6.0 6.8 7.9
Loan losses 1,807 1,183 461 1.8 1.4 0.7
Depreciation 4,083 3,346 2,752 4.1 3.8 4.0
Other 7,777 6,834 4,871 7.8 7.8 7.1
--------- --------- --------- ----- ----- -----
Total store expense $ 67,103 $ 59,376 $ 48,552 67.0% 67.9% 70.4%
========= ========= ========= ===== ===== =====
Average per store expense $ 103.2 $ 102.2 $ 97.5
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997. Store expenses increased $7.7 million, or
13%, in fiscal 1998 over fiscal 1997, primarily as a result of the increased
number of stores open during the period. Average store expense increased by
approximately $1,000 per store in fiscal 1998 as compared to fiscal 1997. Store
expenses decreased as a percentage of revenues from 67.9% in fiscal 1997 to
67.0% in fiscal 1998, principally as a result of the increase in average
revenues per store. Salaries and benefits expenses, occupancy costs, and armored
and security expenses combined increased $5.3 million, or 13%, primarily as a
result of the increased number of stores in operation. Returned checks, net of
collections, and cash shortages increased $0.1 million, or 2%, in fiscal 1998
as compared to fiscal 1997. Returned checks, net of collections, and cash
shortages decreased as a percentage of revenues from 6.8% in fiscal 1997 to
6.0% in fiscal 1998. Loan losses increased $0.6 million in fiscal 1998 over
fiscal 1997, but decreased as a percentage of loan fees and interest revenue
from 21% in fiscal 1997 to 18% in fiscal 1998. Depreciation expense increased
$0.7 million, or 22%, due to the increased number of stores in operation during
fiscal 1998 as compared to fiscal 1997. Other store expenses increased $0.9
million, or 14%, but remained constant at 7.8% of revenue for both fiscal
years.
FISCAL 1997 COMPARED TO FISCAL 1996. Store expenses increased $10.8 million,
or 22%, in fiscal 1997 over fiscal 1996, primarily as a result of the increased
number of stores open during the period. Average store expense increased by
approximately $4,700 per store. Store expenses decreased as a percentage of
revenues from 70% in fiscal 1996 to 68% in fiscal 1997, principally as a result
of the increase in average revenues per store. Salaries and benefits expenses,
occupancy costs, and other expense increased primarily as a result of the
increased number of stores in operation. Returned checks, net of collections,
and cash shortages increased $0.5 million, or 9%, in fiscal 1997 as compared to
fiscal 1996, primarily as a result of the additional stores open during the
20
<PAGE>
period. Returned checks, net of collections, and cash shortages decreased as a
percentage of revenues from 7.9% in fiscal 1996 to 6.8% in fiscal 1997. Loan
losses increased $0.7 million in fiscal 1997 over fiscal 1996 and increased
slightly as a percentage of loan fees and interest revenue from 19% in fiscal
1996 to 21% in fiscal 1997.
<TABLE>
<CAPTION>
OTHER EXPENSE ANALYSIS
- -------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
--------------------------------------------------------------
($ IN THOUSANDS) (PERCENTAGE OF REVENUE)
1998 1997 1996 1998 1997 1996
--------- --------- --------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Region expenses $ 8,353 $ 7,477 $ 5,647 8.3% 8.6% 8.2%
Headquarters expenses 7,198 6,106 4,744 7.2 7.0 6.9
Franchise expenses 965 1,046 458 1.0 1.2 0.7
Other depreciation and
amortization 3,502 3,024 2,152 3.5 3.5 3.1
Interest expense, net 2,437 2,271 1,714 2.4 2.6 2.5
Other expenses 49 213 236 0.0 0.2 0.3
</TABLE>
REGION EXPENSES
FISCAL 1998 COMPARED TO FISCAL 1997. Region expenses increased $0.9 million,
or 12%, in fiscal 1998 over fiscal 1997. The increase is primarily the result
of an increase in salaries and benefits, occupancy costs, and the number of
region personnel from 93 employees in fiscal 1997 to 104 employees in fiscal
1998. Region expenses decreased as a percentage of revenues from 8.6% for
fiscal 1997 to 8.3% for fiscal 1998.
FISCAL 1997 COMPARED TO FISCAL 1996. Region expenses increased $1.8 million,
or 32%, in fiscal 1997 over fiscal 1996. The increase is primarily the result
of increased salaries and benefits during fiscal 1997. In addition, for fiscal
1997, district supervisors became full-time regional management and all their
salaries and benefits were allocated to region expenses; previously a portion
of their salaries was allocated to their store expense. Region expenses
increased as a percentage of revenues from 8.2% for fiscal 1996 to 8.6% for
fiscal 1997.
HEADQUARTERS EXPENSES
FISCAL 1998 COMPARED TO FISCAL 1997. Headquarters expenses increased $1.1
million, or 18%, in fiscal 1998 over fiscal 1997. The increase is the result of
additional salaries and benefits, primarily related to merit increases, and
additional information systems and financial planning personnel. Headquarters
expenses as a percentage of revenue increased from 7.0% in fiscal 1997 to 7.2%
in fiscal 1998.
FISCAL 1997 COMPARED TO FISCAL 1996. Headquarters expenses increased $1.4
million, or 29%, in fiscal 1997 over fiscal 1996. The increase is primarily
the result of increases in headquarters personnel, related salary increases,
management bonuses, and increased rent due to additional floor space for
corporate headquarters. Headquarters expenses as a percentage of revenue
increased slightly from 6.9% in fiscal 1996 to 7.0% in fiscal 1997.
FRANCHISE EXPENSES
FISCAL 1998 COMPARED TO FISCAL 1997. Franchise expenses relate to the
salaries, benefits and other franchisee support costs for the sales and support
personnel in the ACE Franchise Group. Franchise expenses decreased $0.1
million from fiscal 1997 to fiscal 1998, and decreased as a percentage of
revenue from 1.2% in fiscal 1997 to 1.0% in fiscal 1998.
FISCAL 1997 COMPARED TO FISCAL 1996. Franchise expenses increased $0.6 million
from fiscal 1996 to fiscal 1997, because fiscal 1996 includes only five months
of expenses (subsequent to the acquisition of Check Express, Inc. on February 1,
1996), while fiscal 1997 includes expenses for 12 months.
21
<PAGE>
OTHER DEPRECIATION AND AMORTIZATION
FISCAL 1998 COMPARED TO FISCAL 1997. Other depreciation and amortization
increased $0.5 million, or 16%, for fiscal 1998 as compared to fiscal 1997.
This increase was attributable to an increase in amortization of intangibles
(goodwill and non-competition agreements) resulting from the 15 stores acquired
during fiscal 1998 and the 12 stores acquired during the last half of fiscal
1997. The increase was also attributable to an increase in depreciation
expense resulting from the 62 stores opened in fiscal 1998 and the 20 stores
opened in the last half of fiscal 1997.
FISCAL 1997 COMPARED TO FISCAL 1996. Other depreciation and amortization
increased $0.9 million, or 41%, for fiscal 1997 as compared to fiscal 1996.
This increase was primarily attributable to an increase in amortization of
intangibles (goodwill and non-competition agreements) resulting from the 46
stores acquired during fiscal 1997 and the 69 stores acquired during the last
half of fiscal 1996.
INTEREST EXPENSE
FISCAL 1998 COMPARED TO FISCAL 1997. Interest expense, net of interest income,
increased $0.2 million, or 7%, in fiscal 1998 as compared to fiscal 1997.
FISCAL 1997 COMPARED TO FISCAL 1996. Interest expense, net of interest income,
increased $0.6 million, or 32%, in fiscal 1997 as compared to fiscal 1996. This
increase was primarily attributable to increased borrowings to fund the
acquisition of 46 stores during fiscal 1997.
INCOME TAXES
FISCAL 1998 COMPARED TO FISCAL 1997. A total of $4.2 million was provided for
income taxes for fiscal 1998 as compared to $3.1 million in fiscal 1997. The
provisions for income taxes were calculated based on the statutory federal
income tax rate of 34%, plus a provision for state income taxes and non-
deductible goodwill associated with the acquisition of Check Express, Inc. on
February 1, 1996. The effective income tax rate was 39.5% for fiscal years
1998 and 1997.
FISCAL 1997 COMPARED TO FISCAL 1996. A total of $3.1 million was provided for
income taxes for fiscal 1997 as compared to $2.1 million in fiscal 1996. The
provisions for income taxes were calculated based on the statutory federal
income tax rate of 34%, plus a provision for state income taxes and non-
deductible goodwill associated with the acquisition of Check Express, Inc.
BALANCE SHEET VARIATIONS
Cash and cash equivalents, the money order principal payable, and the revolving
advances from Integrated Payment Systems, Inc. (the "Money Order Supplier")
vary because of seasonal and day-to-day requirements resulting from maintaining
cash for cashing checks and making loans, receipts of cash from the sale of
money orders, loan volume, and remittances on money orders sold. For the fiscal
year ended June 30, 1998, cash and cash equivalents increased $4.7 million,
compared to a decrease of $1.1 million for the year ended June 30, 1997.
Accounts and notes receivable increased $1.4 million during the year ended June
30, 1998, primarily as a result of the Company's deferred deposit product.
Property and equipment and the excess of purchase price over the fair value of
net assets acquired increased $1.9 million and $2.4 million, respectively,
during the fiscal year ended June 30, 1998, as a result of the 15 stores
acquired and the 62 stores opened during fiscal 1998, offset by related
depreciation and amortization.
Term advances from the Money Order Supplier, for the Company's acquisition and
expansion activities ("Term Advances"), decreased by $1.1 million due to net
repayments during fiscal 1998. Other liabilities increased by
22
<PAGE>
$2.6 million during the year ended June 30, 1998, principally as a result of
deferred income related to a $3 million payment to the Company from Travelers
Express Company, Inc. ("Travelers Express") in connection with the new money
order and bill payment agreements. See "Liquidity and Capital Resources - New
Money Order Agreement" below and Note 4 of Notes to Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operating Activities
During fiscal 1998, 1997 and 1996, the Company had net cash provided by
operating activities of $14.2 million, $9.4 million, and $10.4 million,
respectively.
During fiscal 1998, 1997 and 1996, the Company recognized $1.5 million, $1.5
million and $0.3 million in deferred revenue, respectively. Under the 1996
MoneyGram Master Agreement, currently with MoneyGram Payment Systems, Inc. (the
"MoneyGram Agreement"), the Company received an initial bonus of $2 million in
June 1996. The MoneyGram Agreement also provides for incentive bonuses for
opening new locations at which MoneyGram services are offered as well as
certain other performance incentives. The initial bonus and incentive bonuses
are recognized as revenue over the term of the MoneyGram Agreement. The
aggregate amount of those additional bonuses and incentives earned by the
Company for the fiscal year ended June 30, 1998, was $1.4 million.
Cash Flows from Investing Activities
During fiscal 1998, 1997 and 1996, the Company used $5.7 million, $4.9 million
and $3.4 million, respectively, for purchases of property and equipment related
principally to new store openings and remodeling existing stores. Capital
expenditures related to acquisitions, including related liabilities incurred,
amounted to $4.7 million, $10.8 million and $14.2 million for the fiscal years
ended June 30, 1998, 1997 and 1996, respectively. In addition, during fiscal
1997, the Company received $2.5 million from the disposition of net assets held
for sale.
The Company's total budgeted capital expenditures, excluding acquisitions, are
currently anticipated to be approximately $6.6 million during its fiscal year
ending June 30, 1999, in connection with the opening of 90 new stores, the
relocation or remodeling of certain existing stores, and computer system
upgrades. The actual amount of capital expenditures will depend in part on the
number of new stores opened, the number of stores acquired, and the number of
existing stores that are relocated or remodeled. The Company believes that
its existing resources, anticipated cash flows from operations, the Money Order
Supplier's commitment to make Term Advances under the Money Order Agreement,
and the Company's new credit facility (to be effective upon termination of the
relationship with the Money Order Supplier) will be sufficient to finance its
planned expansion and operations during fiscal 1999. 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 and related businesses of the type conducted by the
Company.
Cash Flows from Financing Activities
During fiscal 1998, 1997 and 1996, the Company had net cash provided by
financing activities of $0.9 million, $2.6 million and $14.6 million,
respectively. During fiscal 1998, the Company received $1.5 million proceeds
from the exercise of stock options, reduced its Term Advances by $1.1 million,
paid $0.4 million of acquisition-related notes payable, and borrowed $1.0
million of revolving advances from the Money Order Supplier.
In fiscal 1997, the Company completed a private placement for $20 million of
9.03% Senior Secured Notes ("Notes") issued to Principal Life Insurance Company
(formerly known as Principal Mutual Life Insurance Company) ("Principal") under
the Note Purchase Agreement dated as of November 15, 1996. The principal
23
<PAGE>
amount of these Notes is due in five equal annual installments of $4 million
each, beginning November 15, 1999. Interest payments are due semiannually,
beginning May 15, 1997. The Notes include various restrictive covenants. See
"Business - Arrangements Regarding Secured Notes." Net proceeds from the
issuance of the Notes were primarily used in fiscal 1997 to pay the then
outstanding $18.5 million principal plus accrued interest on the Term Advances
from the Money Order Supplier.
Money Order Supplier
The Money Order Agreement provides a commitment by the Money Order Supplier to
make advances to the Company, in addition to the Term Advances. Those other
advances may generally be used for working capital purposes other than the
payment of operating expenses and capital expenditures. The total amount of
deferred money order remittances payable to the Money Order Supplier and
advances made by the Money Order Supplier under the Money Order Agreement
(other than Term Advances) may not exceed the Company's cash balances and cash
equivalents (including checks cashed by the Company that are being processed
for payment). In addition, the amount of such deferred money order remittances
and such working capital advances are limited based upon the Company's volume
of money order sales. The interest on working capital advances from the Money
Order Supplier is based on a per annum rate of 1.5% over the prime rate. See
"Business - Relationships with the Money Order Supplier and MoneyGram Supplier"
and Note 4 of Notes to Consolidated Financial Statements.
The Term Advances available under the Money Order Agreement are for 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.
The Money Order Agreement includes various restrictive covenants, including,
among other things, financial coverage ratios, limitations on the incurrence of
indebtedness, operating cash flow minimums and restrictions on permitted
capital expenditures and the payment of dividends. The Company's obligations
under the Money Order Agreement are collateralized by all the assets of the
Company. The Money Order Agreement expires on December 31, 1998, but may be
terminated early under certain circumstances. See "Business - Relationships
with the Money Order Supplier and MoneyGram Supplier" and Note 4 of Notes to
Consolidated Financial Statements.
New Money Order Agreement
In April 1998, the Company signed a new money order agreement with Travelers
Express Company, Inc. ("Travelers Express"), to become effective January 1,
1999. This agreement will replace the existing Money Order Agreement with the
Money Order Supplier that expires December 31, 1998. Under the new five-year
agreement, the Company will exclusively sell Travelers Express money orders,
which will bear the Company's logo. The Company also signed a five-year
agreement with Travelers Express, effective in April 1998, to offer an
electronic bill-payment service to the Company's customers. In conjunction
with these two agreements, the Company received $3 million from Travelers
Express in April 1998 and is entitled to receive an additional $400,000 per
year for the next five years. The $3 million payment was deferred and included
in other liabilities in the Consolidated Balance Sheet. The total $5 million
from Travelers Express will be amortized on a straight-line basis over the
five-year term of the agreements beginning January 1999.
New Credit Facilities
In July 1998, the Company entered into a Credit Agreement with a syndicate of
banks (the "Lenders") represented by Wells Fargo Bank (Texas), National
Association ("Wells Fargo Bank"), as lead agent and Chase Bank of Texas as
co-agent (the "Credit Agreement"). The Credit Agreement provides for credit
facilities to the Company that are available only upon the expiration or
termination of the existing Money Order Agreement with
24
<PAGE>
the Money Order Supplier, which is currently expected to be January 1, 1999.
The contemplated credit facilities consist of a revolving (line-of-credit)
facility of $90 million (the "Revolving Facility") and a term-loan facility of
$35 million (the "Term-Loan Facility"). The Revolving Facility is to be used
for working capital and general corporate purposes of the Company, and the
Term-Loan Facility is to be used for store construction and relocation and
other capital expenditures of the Company, including acquisitions. Also, upon
certain conditions, the Company will have available from Wells Fargo Bank (i)
an additional ten-day revolving advance facility of up to $15 million, in
addition to the Revolving Facility, and (ii) a standby letter-of-credit
facility of up to $1.5 million. The Revolving Facility will in effect replace
the deferred money order remittances and revolving advances now obtained and
used by the Company under the existing Money Order Agreement, and the Term-Loan
Facility will in effect replace the Term Advance facility under the existing
Money Order Agreement. The Company expects to borrow under the Credit
Agreement, upon the availability of the facilities, to refinance the
outstanding borrowings from the Money Order Supplier and to discharge the
Company's obligations to pay money order proceeds to the Money Order Supplier
under the existing Money Order Agreement. The total amount of funds available
under the Revolving Facility may not exceed the Company's cash balances and
cash equivalents (including checks cashed by the Company that are being
processed for payment).
The Revolving Facility will be available to the Company for 364 days after July
31, 1998, and all unpaid principal and accrued interest under the Revolving
Facility will then be due. The Term-Loan Facility will be available to the
Company for one year after July 31, 1998, and all amounts outstanding under the
Term-Loan Facility at that date will be payable over the succeeding four years;
principal will be payable quarterly based on a four-year straight-line
amortization. Borrowings under the Revolving Facility will bear interest at an
annual rate equal to, at the Company's discretion, either the prime rate
publicly announced by Wells Fargo Bank (the "Prime Rate") or the London
InterBank Offered Rate ("LIBOR") plus 0.75%. Borrowings under the Term-Loan
Facility will bear interest at an annual rate equal to, at the Company's
discretion, either the Prime Rate plus 0.25% or LIBOR plus 1.75%. Interest
will generally be payable monthly, except on LIBOR-rate borrowings; interest on
LIBOR-rate borrowings will be payable every 30, 60, or 90 days, depending on
the period selected by the Company.
The Credit Agreement also provides for the Company's prepayment to the Lenders
of certain amounts due under the Term-Loan Facility upon certain events that
occur after July 31, 1999. Those events include (i) the sale of assets from
which the Company has received net proceeds of at least $5 million during a
fiscal year, (ii) the Company's issuance of equity securities, and (iii) the
Company's having excess cash flow, as defined in the Credit Agreement, for a
fiscal year.
Under the Credit Agreement, the Company must pay a commitment fee equal to 0.1%
of the total amount of the Revolving Facility and the Term-Loan Facility until
those facilities become available. During the availability of those
facilities, the Company will pay a commitment fee equal to 0.2% of the unused
portion of the Revolving Facility and 0.45% of the unused portion of the Term-
Loan Facility.
Although the Credit Agreement as now in effect provides that the Revolving
Facility will be available for 364 days after July 31, 1998, that short-term
availability resulted in rates and other terms quite favorable to the Company,
and the Company expects that facility to be renewed at the expiration of that
period. There can be no assurance, however, that the anticipated renewal will
be effected. If no such renewal is effected, the Company will have to obtain
financing from other sources, and that financing might be on terms less
favorable to the Company than those set forth in the Credit Agreement for the
Revolving Facility. The Company believes that other sources of financing would
be available to it if necessary; however, if the Company were unable to obtain
financing from one or more other sources, the Company's liquidity and
operations would be materially and adversely affected.
The Credit Agreement may be terminated before the stated expiration or maturity
dates of the Revolving Facility and the Term-Loan Facility - requiring all
unpaid principal and accrued interest to be paid to the Lenders - upon any
Event of Default as defined in the Credit Agreement. The Events of Default
include (i) nonpayment of amounts due to the Lenders under the Credit
Agreement, (ii) failure to observe or perform covenants set forth in
25
<PAGE>
the Credit Agreement that are not cured, (iii) a change in control of the
Company, and (iv) an event or circumstance that has a material adverse effect
on the Company's business, operations, financial condition, or prospects.
During the availability of the credit facilities under the Credit Agreement,
the Company will be subject to various restrictive covenants. The covenants in
the Credit Agreement, which are typical of those found in loan agreements of
that kind, include restrictions on the incurrence of indebtedness from other
sources, restrictions on advances to or investments in other persons or
entities, restrictions on significant acquisitions, restrictions on the payment
of dividends to shareholders or the repurchase of shares, and the requirement
that various financial ratios be maintained.
The Company's payment and performance of its obligations under the Credit
Agreement and ancillary documents will be secured by liens on all its assets.
The collateral arrangements will be subject to the Amended and Restated
Collateral Trust Agreement dated as of July 31, 1998 (the "Amended Collateral
Trust Agreement") that was signed with the Credit Agreement. The Amended
Collateral Trust Agreement will amend and supersede the existing Collateral
Trust Agreement dated as of November 15, 1996, entered into at the time of the
Note Purchase Agreement with Principal. The Amended Collateral Trust Agreement
will create a collateral trust, with Wilmington Trust Company as trustee, to
secure the Company's obligations under the Credit Agreement and to the
Company's two other secured lenders, Principal and Travelers Express. The
Amended Collateral Trust Agreement includes agreements regarding the priority
of distributions to the secured lenders upon foreclosure and liquidation of the
collateral subject thereto and certain other intercreditor arrangements.
IMPACT OF THE YEAR 2000 ISSUE
The "Year 2000 Issue" is the result of computer programs that use two digits
instead of four to record the applicable year. Computer programs that have
date-sensitive software might recognize a date using "00" as the year 1900
instead of the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
events, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company currently believes that, based on a recent internal assessment of
its technology infrastructure, the Company will not be required to modify or
replace significant portions of its software or hardware so that its computer
systems will properly recognize dates beyond December 31, 1999.
The Company also believes that its software and hardware with the Year 2000
Issue can be modified or replaced with upgraded or new software at a cost that
will not be material to the Company's operations or financial condition.
Further, the Company does not believe that its operations have been or will be
disrupted to any material extent by the Year 2000 Issue with its existing
software or hardware or by its activities to address the Year 2000 Issue.
The Company believes that it has identified the most significant pieces of its
software and items of its hardware with the Year 2000 Issue; that software
includes portions of its accounting software and data processing software for
the Company's AS400 computer. However, the Company believes that modifications
or replacements for that software or to that hardware are readily available in
the marketplace or from suppliers of that software to the Company. The Company
has begun to schedule the processes to modify or replace (as the case may be)
that software and hardware. The Company plans to use its own personnel,
consultants, and resources and the personnel of its software suppliers to
modify or replace software and hardware. The Company plans to complete the
necessary modification and replacement of its software and hardware to address
the Year 2000 Issue by the end of fiscal 1999.
The Company has contacted its significant suppliers to determine the extent to
which the Company may be vulnerable to those parties' failure to remediate
their own Year 2000 Issues. The Company's plans to address the
26
<PAGE>
Year 2000 Issue, as well as the estimated cost to address it stated below,
include the estimated time and cost associated with the impact of such other
parties' Year 2000 Issues, based on currently available information. However,
the Company's information in this regard is not necessarily complete. There
can be no guarantee that the systems of other companies with which the
Company's systems interface will be timely converted (if necessary), or that a
failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not require the Company to spend more time or
money than estimated, or even have a material adverse effect on the Company.
The Company estimates that the total cost of addressing its Year 2000 Issue
will be approximately $0.25 million (excluding the compensation cost of its
existing technology personnel, which would have been incurred anyway). That
estimated cost, as well as the Company's existing plans to address the Year
2000 Issue, are based on various assumptions, including the availability of
internal and external technological resources and other parties' software
modification plans. There can be no guarantee that this estimate and these
plans will be achieved, however. Specific factors that might cause actual
results to differ include, but are not necessarily limited to, the availability
and cost of technology personnel trained in this area and the ability to locate
and correct all relevant computer codes.
OPERATING TRENDS
SEASONALITY
The Company's business is seasonal to the extent of the impact of cashing tax
refund checks and two other tax-related services -- electronic tax filing and
processing applications for refund anticipation loans. The impact of these
services is in the third and fourth quarters of the Company's fiscal year.
IMPACT OF INFLATION
Management believes that the Company's results of operations are not dependent
upon the levels of inflation.
FORWARD-LOOKING STATEMENTS
This Report contains, and from time to time the Company or certain of its
representatives may make, "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements are generally
identified by the use of words such as "anticipate," "expect," "estimate,"
"believe," "intend," and terms with similar meanings. Although the Company
believes that the current views and expectations reflected in these forward-
looking statements are reasonable, those views and expectations, and the
related statements, are inherently subject to risks, uncertainties, and other
factors, many of which are not under the Company's control and may not even be
predictable. Those risks, uncertainties, and other factors could cause the
actual results to differ materially from these in the forward-looking
statements. Those risks, uncertainties, and factors include, but are not
limited to, many of the matters described in this Report: the Company's
relationships with the Money Order Supplier, the supplier of MoneyGram
services, Travelers Express, and the Lenders; governmental regulation of
check-cashing and related businesses; theft and employee errors; the
availability of suitable locations, acquisition opportunities, adequate
financing, and experienced management employees to implement the Company's
growth strategy; the fragmentation of the check-cashing industry and
competition from various other sources, such as banks, savings and loans, and
other financial services entities, as well as retail businesses that offer
products and services offered by the Company; and customer demand and response
to products and services offered by the Company. The Company expressly
disclaims any obligations to release publicly any updates or revisions to these
forward-looking statements to reflect any change in its views or expectations.
27
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14(a) 1 for information required for this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
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, 1998 (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.
--------------------
<TABLE>
<S> <C>
Report of independent public accountants . . . . . . . . . . . . . . . . . 34
Consolidated balance sheets as of June 30, 1998 and 1997 . . . . . . . . . 35
Consolidated statements of earnings for the years ended
June 30, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . 36
Consolidated statements of shareholders' equity for the years ended
June 30, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . 37
Consolidated statements of cash flows for the years ended
June 30, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . 38
Notes to consolidated financial statements . . . . . . . . . . . . . . . . 39
</TABLE>
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.
28
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3. Exhibits.
---------
Exhibit Number Exhibits
- -------------- --------
3.1 Restated Articles of Incorporation of the Registrant, as amended through
January 31, 1998. (Included as Exhibit 3.6 to the Company's Form 10-Q
as of December 31, 1997 (Commission File Number 0-20774) and
incorporated herein by reference).
3.2 Amended and Restated Bylaws of the Registrant, as amended through
January 31, 1998. (Included as Exhibit 3.7 to the Company's Form 10-Q
as of December 31, 1997 (Commission File Number 0-20774) and
incorporated herein by reference.)
4.1 Form of Certificate representing shares of Registrant's Common Stock.
(Included as Exhibit 4.1 to the Company's Registration Statement on Form
S-1 (Reg. No. 33-53286) (the "Registration Statement") and incorporated
herein by reference.)
10.1 Ace Cash Express, Inc. 1987 Stock Option Plan, as amended (including
form of Incentive Stock Option Agreement). (Included as Exhibit 10.1 to
the Registration Statement and incorporated herein by reference.)#
10.2 1992 Master Agreement dated October 14, 1992 (the "Money Order
Agreement") between the Company and American Express Travel Related
Services Company, Inc. (the "Money Order Supplier"). (Confidential
treatment for a portion of this document has been granted by the
Securities and Exchange Commission pursuant to Rule 24b-2 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.)
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<PAGE>
10.11 Asset Purchase Agreement dated November 22, 1993, among the Company,
sole proprietor, limited partnership, and general partnerships that
conduct business under the name "Mr. Money Check Cashers" (the
"Sellers"), general partners of the partnership sellers (the "General
Partners"), and an individual agent for the Sellers and the General
Partners (the "Agent"). (Included as Exhibit 2.1 in the Company's Form
8-K filed on December 7, 1993 (Commission File Number 0-20774) and
incorporated herein by reference.)
10.12 Food Stamp Sub-Contract Agreement dated November 22, 1993, between the
Company and the Agent. (Included as Exhibit 2.2 to the Company's Form
8-K filed on December 7,1993 (Commission File Number 0-20774) and
incorporated herein by reference.)
10.13 Ace Cash Express, Inc. 401(k) Profit Sharing Plan, adopted July 1, 1994.
(Included as Exhibit 10.13 to the Company's Form 10-K as of June 30,
1994 (Commission File Number 0-20774) and incorporated herein by
reference.)#
10.14 Ace Cash Express, Inc. Deferred Compensation Plan, adopted July 1, 1994.
(Included as Exhibit 10.14 to the Company's Form 10-K as of June 30,
1994 (Commission File Number 0-20774) and incorporated herein by
reference.)#
10.15 Asset Purchase Agreement dated June 27, 1995, among the Company and
Quick Cash, Inc., Q.C. & G. Financial, Inc., David Christenholz and
Gloria Guerra-Leyva. (Included as Exhibit 2.1 to the Company's Form 8-K
filed on July 11, 1995 (Commission File Number 0-20774) and incorporated
herein by reference.)
10.16 Escrow Agreement dated June 27, 1995, among the Company, Quick Cash,
Inc., Q.C. & G. Financial, Inc., David Christenholz, Gloria Guerra-
Leyva, and Bank One, Arizona, NA, as escrow agent. (Included as Exhibit
2.2 to the 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.)
30
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10.25 Sixth Amendment to Lease Agreement dated February 1, 1996, between the
Company and Greenway Tower Joint Venture. (Included as Exhibit 10.25 to
the Company's Form 10-Q as of March 31, 1996 (Commission File Number
0-20774) and incorporated herein by reference.)
10.26 1996-A Amendment to the MoneyGram Agreement dated March 21, 1996,
between the Company and the Money Order Supplier. (Included as Exhibit
10.26 to the Company's Form 10-K as of June 30, 1996 (Commission File
Number 0-20774) and incorporated herein by reference.)
10.27 1996-B Amendment to the MoneyGram Agreement dated June 27, 1996, between
the Company and the Money Order Supplier. (Included as Exhibit 10.27 to
the Company's Form 10-K as of June 30, 1996 (Commission file Number
0-20774) and incorpor