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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-QSB
[X] Quarterly Report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required)
For the quarterly period ended September 30, 1995.
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from ____________ to ___________.
Commission file number 0-17961
CHECK EXPRESS, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-2731112
- - ------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
101 East Kennedy Boulevard, Suite 3800, Tampa, Florida 33602
- - ------------------------------------------------------ ------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 223-3338
--------------
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Act: Common Stock
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 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
---- ----
There were 5,060,982 shares of common stock outstanding as of
October 31, 1995.
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<TABLE>
<CAPTION>
CHECK EXPRESS, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Page
<S> <C>
Item 1. Consolidated Financial Statements
Interim Unaudited Consolidated Balance Sheets
as of September 30, 1995 and December 31, 1994 3
Interim Unaudited Consolidated Statements of
Income for the three months and nine months ended
September 30, 1995 and September 30, 1994 4
Interim Unaudited Consolidated Statements of
Cash Flows for the nine months ended
September 30, 1995 and September 30, 1994 5
Notes to Interim Unaudited Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
<CAPTION>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on form 8-K 26
Signatures 27
</TABLE>
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<TABLE>
<CAPTION>
CHECK EXPRESS, INC. AND SUBSIDIARIES
INTERIM UNAUDITED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1995 1994
<S>
<C> <C>
ASSETS
CURRENT ASSETS
Cash
$ 1,547,436 $ 1,539,527
Accounts receivable, net
927,160 634,945
Installment notes receivable, net
1,257,778 753,472
Notes receivable
91,815 73,977
Recoverable income taxes
23,107 41,334
Prepaid expenses and other current assets
318,162 389,287
Total current assets
4,165,458 3,432,542
Notes receivable
894,837 953,099
Property and equipment, net
1,619,664 1,652,499
Accounts receivable, net
122,500 122,500
Installment notes receivable, net
1,434,179 825,418
Intangibles, net
2,209,321 2,906,695
Other assets, net
160,841 133,102
Total assets
$ 10,606,800 $ 10,025,855
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks
$ 1,317,858 $ 1,280,000
Notes payable other
- 338,944
Current maturities of capital lease obligations
23,711 35,118
Current maturities of senior long term debt
413,533 159,031
Current maturities of subordinated long term debt
223,870 298,880
Accounts payable
326,634 197,942
Unredeemed money orders
1,394,675 968,195
Income taxes payable
- -
Other liabilities
281,641 296,898
Unearned income
113,823 39,911
Total current liabilities
4,095,745 3,614,919
Capital lease obligations
48,210 65,880
Senior long term debt
1,189,700 1,078,874
Subordinated long term debt
727,766 799,342
Unearned income
193,500 193,500
Accrued franchise commissions
24,750 24,750
Deferred income taxes
174,834 173,708
Total liabilities
6,454,505 5,950,973
COMMITMENTS & CONTINGENCY
- -
STOCKHOLDERS' EQUITY
Common stock - authorized, 10,000,000 shares, $.004 par value;
5,060,982 and 4,973,503 shares issued and outstanding at
September 30, 1995 and December 31, 1994, respectively
20,244 19,894
Additional paid-in-capital
3,698,370 3,653,903
Retained earnings
433,681 401,085
Total stockholders' equity
4,152,295 4,074,882
Total liabilities and stockholders' equity
$ 10,606,800 $ 10,025,855
The accompanying Notes to Interim Unaudited Consolidated Financial Statements
are an integral part of these consolidated financial statements.
</TABLE>
3
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<TABLE>
<CAPTION>
CHECK EXPRESS, INC. AND SUBSIDIARIES
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
September 30, Nine Months Ended September 30,
1995
1994 1995 1994
RESTATED RESTATED
<S> <C>
<C> <C> <C>
REVENUES:
Check cashing service fees $ 1,195,266
$ 1,435,721 $ 3,777,450 $ 4,129,097
Franchise fees 152,055
42,650 293,055 154,450
Franchise royalties 362,934
339,318 1,082,431 982,856
Finance revenues 207,427
93,008 608,004 211,368
Other revenues ( 22,722)
20,033 253,426 56,668
Total revenues 1,894,960
1,930,730 6,014,366 5,534,439
EXPENSES:
Store expenses (includes $78,775, $89,525,
$230,009 and $238,664, respectively, of
depreciation and amortization) 1,193,404
1,341,729 3,669,390 3,703,066
Franchise expenses (includes $20,109, $25,702,
$60,432 and $76,169, respectively, of depreciation
and amortization) 501,187
362,012 1,259,009 829,087
Finance expenses (includes $637, $622, $1,912 and
$1,868, respectively, of depreciation and
amortization) 83,276
51,458 195,969 120,315
Headquarters expenses (includes $19,287, $21,897,
$58,557 and $44,689, respectively, of depreciation
and amortization) 150,466
196,424 506,010 551,855
Interest expense 111,434
78,741 318,796 172,797
Total expenses 2,039,767
2,030,364 5,949,174 5,377,120
Income (loss) before income taxes ( 144,807)
( 99,634) 65,192 157,319
Income taxes (benefit) ( 72,623)
( 50,835) 32,596 64,794
Net income (loss) ($ 72,184)
($ 48,799) $ 32,596 $ 92,525
Earnings per share ($ .01)
($ .01) $ .01 $ .02
Weighted average number of shares of common
stock outstanding 5,060,982
4,815,976 5,019,970 4,806,597
The accompanying Notes to Interim Unaudited Consolidated Financial Statements
are an integral part of these consolidated financial statements.
</TABLE>
4
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<TABLE>
<CAPTION>
CHECK EXPRESS, INC. AND SUBSIDIARIES
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
1995 1994
RESTATED
<S>
<C> <C>
Cash flows from operating activities:
Net income
$ 32,596 $ 92,525
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization
350,910 361,391
Provision for losses on receivables
48,459 23,091
Deferred income taxes
1,126 75,426
(Gain) loss on sale of assets
( 257,292) ( 53,923)
(Income) loss from joint venture on equity method
( 29,574) -
Changes in assets and liabilities (exclusive of
net assets acquired and disposed)
(Increase) decrease in:
Accounts receivable
( 292,215) 66,607
Recoverable income taxes
18,227 16,351
Prepaid expenses and other current assets
92,376 ( 182,336)
Other assets
( 35,233) ( 36,214)
Increase (decrease) in:
Accounts payable
128,692 ( 47,398)
Unredeemed money orders
426,480 50,671
Income taxes payable
- -
Other liabilities
( 15,257) 83,105
Unearned income
73,912 43,761
Net cash provided by (used in) operating activities
543,207 493,057
Cash flows from investing activities:
Installment notes receivable, net
( 1,161,526) ( 1,078,313)
Notes receivable
40,424 7,449
Capital expenditures
( 350,774) ( 691,156)
Cash distributions received from joint venture under equity method
10,850 -
Net cash received (paid) for entities acquired and disposed
992,332 ( 1,233,636)
Net cash (used in) provided by investing activities
( 468,694) ( 2,995,656)
Cash flows from financing activities:
Borrowings under notes payable banks
1,450,410 900,000
Repayment of notes payable to banks
( 1,412,552) -
Borrowings under notes payable other
150,000 245,000
Repayment of notes payable other
( 488,944) ( 106,156)
Borrowings under long term debt
500,000 955,000
Repayment of borrowings under long term debt
( 281,258) ( 206,509)
Repayment of borrowings under capital lease agreements
( 29,077) ( 28,911)
Proceeds from issuances of common stock for
exercise of stock options
44,817 69,862
Net cash (used for) provided by financing activities
( 66,604) 1,828,286
Net increase (decrease) in cash
7,909 ( 674,313)
Cash at beginning of period
1,539,527 2,630,521
Cash at end of period
$ 1,547,436 $ 1,956,208
The accompanying Notes to Interim Unaudited Consolidated Financial Statements
are an integral part of these consolidated financial statements.
</TABLE>
5
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<TABLE>
<CAPTION>
CHECK EXPRESS, INC. AND SUBSIDIARIES
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
1995 1994
RESTATED
<S>
<C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes
$ 24,910 $ 4,800
Interest
$ 309,455 $ 178,424
</TABLE>
Non-cash financing and investing activities:
In January 1994, the Company acquired two check cashing money
centers in the Tampa, Florida market from a Check Express USA, Inc.
franchisee for a total of $50,000 in cash and a note payable of
$160,000.
In February 1994, the Company acquired all the outstanding common
stock of Peterlyn, Inc., a Washington corporation, which owned and
operated four check cashing money centers in the Seattle/Tacoma,
Washington market under franchise agreements with Check Express
USA, Inc. The total consideration given was $488,465 in cash and a
note payable of $89,725.
In May 1994, the Company purchased three check cashing money
centers in Stockton, California for $250,000 in cash and a note
payable of $225,000.
In July 1994, the Company purchased two check cashing money centers
in Modesto, California from a Check-X-Change franchisee for
$100,000 in cash and a note payable of $40,144.
In August 1994, the Company acquired three check cashing money
centers in Tacoma, Washington for $100,000 in cash and a note
payable of $500,000.
In September 1994, the Company acquired a food stamp distribution
services operation in Stockton, California for a note payable of
$72,869.
In April 1994, the Company sold the non-cash assets of the check
cashing money center in Atlanta, Georgia, acquired in November
1993, plus $60,000 in cash to an unrelated third party for a note
receivable of $280,000.
In July 1994, the Company sold all the non-cash assets of a check
cashing money center in Portland, Oregon for $40,000 in cash.
In August 1994, the Company sold all the non-cash assets, except
for land and a building, of two check cashing money centers in
Charleston, South Carolina to a Check Express USA, Inc. franchisee
for $50,000 in cash and a note receivable of $100,000.
In October 1994, the Company sold all the non-cash assets of two
check cashing money centers in West Palm Beach, Florida, plus
$120,000 in cash, to a former employee for a note receivable of
$650,000.
In January 1995, the Company sold substantially all the non-cash
assets of five check cashing money centers in Stockton and Modesto,
California, to an unrelated third party for $1,010,232. See note
3.
The accompanying Notes to Interim Unaudited Consolidated
Financial Statements
are an integral part of these consolidated financial statements.
6
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CHECK EXPRESS, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BUSINESS
Check Express, Inc. (the "Company"),a publicly-held company (NASDAQ
symbol "CHXS"), is a financial services company which through its
wholly-owned subsidiaries owns, operates and franchises retail
money centers and provides small consumer loans and used vehicle
loans to individuals who generally do not qualify for traditional
sources of financing. The Company owns and operates stores in
Florida, Washington, and Indiana and has franchise stores operating
in 26 states.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The interim unaudited consolidated financial statements of the
Company at September 30, 1995, and for the periods then ended were
prepared in accordance with generally accepted accounting
principles and in accordance with the instructions of Form 10-QSB.
It is the opinion of management that all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of the
financial position at September 30, 1995, and the results of
operations and cash flows for the periods then ended, have been
included.
The September 30, 1994 financial position, results of operations
and cash flows for the periods then ended have been restated for
the effects of adjustments made in the fourth quarter 1994 which
also affected the third quarter 1994. These fourth quarter 1994
adjustments and their respective effects on the periods ended
September 30, 1994 are described further as follows.
The Company expensed a finders fee to an employee of $61,000
related to a 1994 acquisition which had previously been
inadvertently capitalized in the period ended September 30, 1994.
The adjustment reduced net income in periods ended September 30,
1994 by $30,500 ($0.01 per share).
The Company also reduced finance revenues for the periods ended
September 30, 1994, by $59,000, as a result of the discovery of a
system error in recording early payoffs of certain auto loans. The
adjustment reduced net income for the periods ended September 30,
1994 by $29,500 ($0.01 per share).
Principles of Consolidation
The interim unaudited consolidated financial statements include the
accounts of the Company and its subsidiaries. All subsidiaries are
wholly owned. All significant intercompany transactions and
balances have been eliminated in consolidation. The Company has a
fifty percent interest in a joint venture which is accounted for
under the equity method.
7
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Franchise Fees Receivable
Management continuously monitors the franchisee's performance and
if the current facts and circumstances indicate that there now
exists a degree of uncertainty about the franchisee's ability to
open a future store(s) or to pay fees due the Company, then an
appropriate allowance is established to provide for possible
uncollectible amounts.
At September 30, 1995 and December 31, 1994, accounts receivable
(net) from franchisees and the related accrued commissions (not
payable until the account is collected) are as follows:
<TABLE>
<CAPTION>
September 30,
December 31,
1995
1994
<S> <C> <C>
<C>
Accounts receivable $ 448,712
$ 478,617
Allowance for doubtful accounts 25,000
25,000
$ 423,712
$ 453,617
Current, net of allowance for
doubtful accounts of $0 and
$0, respectively $ 301,212
$ 331,117
Long-term, net of allowance for
doubtful accounts of $25,000
and $25,000, respectively 122,500
122,500
$ 423,712
$ 453,617
Unearned income:
Current $ 109,945
$ 36,500
Long term 193,500
193,500
$ 303,445
$ 230,000
Accrued Commissions (net) $ 26,125
$ 8,220
</TABLE>
The long term accounts receivable are non-interest bearing. Any
discount factor is not considered material to the financial
statements. The unearned income balances represent cash payments
received under franchise agreements prior to the earnings process
being completed and/or amounts recorded with a comparable account
receivable recorded to reflect the terms of existing contracts in
the balance sheet.
Also included in the Company's accounts receivable balances as of
September 30, 1995 and December 31, 1994, are three receivables
totaling $52,000 related to and securitized by legal judements
awarded to Check-X-Change Corporation. These judgments were
existing at the time of the acquisition of Check-X-Change
Corporation, and the Company believes these receivables are fully
collectible.
8
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Installment Notes Receivable
Balances related to the Company's installment notes receivable as
of September 30, 1995 and December 31, 1994 were as follows:
<TABLE>
<CAPTION>
September 30,
December 31,
1995
1994
<S> <C> <C>
<C>
Gross balances:
Consumer loans $ 35,097
$ 122,739
Auto loans 3,930,314
2,211,581
3,965,411
2,334,320
Unearned Discount ( 1,210,236)
( 734,298)
Net before reserve for losses 2,755,175
1,600,022
Reserve for losses ( 63,218)
( 21,132)
Installment notes receivable, net $ 2,691,957
$ 1,578,890
</TABLE>
Reserve for losses on these contracts is currently being recorded
at a level to provide six percent of the balance outstanding for
the consumer loans and one percent of the net balance outstanding
for the auto loans. These percentages have been determined to be
reasonable based on small finance company industry levels as
adjusted for the Company's historical experience to date (the
finance company operation began in the fourth quarter 1993). The
Company has several protective mechanisms in place with respect to
each type of installment note receivable, including non-file
insurance relative to the consumer loans and recourse arrangements
with the dealers on the auto loans. Loan origination costs, if
any, are not significant and are expensed when incurred.
Approximately $20,000 of the increase in the provision for loan
losses is due to reserves established for losses anticipated
related to installment notes receivable purchased from a used
automobile dealer, who has recently experienced financial
difficulties and, as a result, gone out of business. As of October
31, 1995, the Company has thirty eight active accounts purchased
from this dealer, with an aggregate balance due net of unearned
discount of approximately $65,000, approximately $56,000 of which
is contractually current within 30 days on their payments due. As
of the same date, the Company has ten accounts from this dealer
currently in repossession, such accounts having a balance due net
of unearned discounts of approximately $18,000. One of the other
two dealers with which the Company does business is assisting in
repossessing and either retailing or selling at auction the
automobiles underlying any of these installment notes receivable
which are or may become non-performing. The total balance due net
of unearned discount from the forty eight accounts purchased from
this dealer is approximately $83,000, or 3% of the Company's total
installment notes receivable as of September 30, 1995 of $2,692,000
and 132% of the reserve for doubtful accounts of $63,000
established as of September 30, 1995.
Earnings per Share
Earnings per share (EPS) for the periods ended September 30, 1995
and 1994 are based on the weighted average number of common shares
outstanding during the periods since the amounts calculated using
the modified treasury
9
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stock method were anti-dilutive in the aggregate for both the
primary and fully diluted earnings per calculations.
The Company has warrants outstanding issued in connection with the
Company's public offering of Units in 1993. Each Unit consisted of
four shares of Common Stock and two Warrants. Each Warrant
entitles the holder thereof to purchase one share of Common Stock
at the stated exercise price of $3.00 per share. The terms of each
Warrant are governed by a Warrant Agreement and a Warrant
Certificate. These Warrants had an original Expiration Date of
June 24, 1995. However, the Company's Board of Directors approved
the extension of this Expiration Date until December 31, 1996, but
has not extended the Company's registration obligation relating to
the shares of common stock underlying the Warrants except as to any
period of time during which the Warrants are and have been "in the
money" for not less than thirty calendar days.
NOTE 3 - ACQUISITIONS AND DISPOSITIONS
In August 1994, the Company purchased three stores in Tacoma,
Washington for a total consideration of $600,000, $100,000 in cash
and $500,000 in a twelve year subordinated note at 12% interest
with monthly principal and interest payments.
This transaction has been accounted for as a purchase in accordance
with APB No. 16 "Business Combinations". Accordingly, the results
of the acquired company's operations have been included herein
since the effective date of the acquisition. The following are pro
forma results of operations for the nine months ended September 30,
1994 assuming the transaction was effective as of January 1, 1994.
<TABLE>
<CAPTION>
Unaudited
Three
Months Nine Months
Ended Ended
September 30, September 30,
1994
1994
<S> <C> <C>
<C>
Revenues $
2,011,566 $ 5,938,619
Income before income taxes (
85,634) 227,320
Net income (
39,359) 139,723
Earnings per share (
.01) .03
</TABLE>
In May 1994, the Company purchased three stores in Stockton,
California for a total consideration of $475,000, $250,000 in cash
and $225,000 in a five year subordinated note at 8% interest per
annum, with monthly principal and interest payments.
In July 1994, the Company purchased two stores in Modesto,
California from a Check-X-Change franchisee for a total
consideration of $150,000, $100,000 in cash and $50,000 in an
unsecured, non-interest bearing promissory note payable in equal
monthly installments.
In September 1994, the Company purchased a food stamp distribution
operation in Stockton, California for a total compensation of
$82,500 in the form of a forty-two month, non-interest bearing
promissory note payable. Monthly payments of $4,750 for the first
six months commencing in September 1994 and $1,500 for the thirty-
six months
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thereafter are contingent upon the continuation of an extension or
renewal of the underlying Services Agreement assigned to and
assumed by the Company in this transaction.
The transactions described in the three preceding paragraphs were
accounted for as purchases under APB No. 16 "Business Combinations"
and the results of their operations subsequent to their acquisition
have been included herein. Pro forma information is not presented
herein as such data is not considered material to the financial
statements.
During 1995 and 1994, no portion of excess purchase price has been
allocated to customer lists as management's estimate of the value
of such assets related to these particular operations is
insignificant. In prior years, some amounts were identified as
allocable to customer lists in conjunction with recording certain
acquisitions.
In April 1994, the Company sold to an unrelated third party all the
non-cash assets, plus cash of approximately $60,000, of the
Atlanta, Georgia. The consideration received was a $280,000 note,
principal and interest at 9% per annum payable monthly, with the
unpaid balance due March 31, 1997. The consideration received was
greater than the carrying value of the assets sold.
In July 1994, the Company sold all of the non-cash assets of a
store in Portland, Oregon for $40,000 cash. This store was
previously acquired as part of the acquisition of Check-X-Change.
In August 1994, the Company sold all of the non-cash assets, except
for land and a building, of two stores in Charleston, South
Carolina to a Check Express franchisee for a total consideration of
$150,000, $50,000 in cash and $100,000 in a five year note at 9%
with monthly principal and interest payments. The building is
being leased to the franchisee.
Effective October 1, 1994, the Company sold all of the non-cash
assets, plus cash of $120,000, of two stores in the West Palm
Beach, Florida market to the Galleon Corporation, the principal
shareholder of which is a former employee of the Company, under a
Check Express USA, Inc. franchise agreement. The consideration
received was a $650,000 note, principal and interest at 8.75% per
annum payable monthly beginning in February 1995, with interest
compounded monthly from the date of the note, October 1, 1994. In
connection with the sale of these stores, the Company has
unconditionally guaranteed to pay any and all claims of Western
Union Financial Services, Inc. in connection with the day to day
operation of these stores as it pertains to Western Union Money
Transfer Drafts until December 31, 1995. The amounts of such
drafts outstanding and guaranteed by the Company at September 30,
1995 and December 31, 1994 were $46,280 and $18,917, respectively.
Effective January 31, 1995, the Company sold substantially all the
non-cash assets of five check cashing stores located in Stockton
and Modesto, California to California Check Cashing Stores, Inc.,
an unrelated California corporation, for $1,010,232 in cash. These
stores, which were acquired during 1994 in two separate acquisition
transactions, represented approximately nine percent (unaudited) of
the Company's revenues for 1994, and eight percent (unaudited) of
the Company's total assets. The sale of these five stores resulted
in a gain of approximately $290,000 (unaudited), before income
taxes, recorded by the Company in the first quarter 1995.
11
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NOTE 4 - INCOME TAXES
The Company has estimated its effective tax rate for 1995 at
approximately 50%. The significant differences between the
statutory rate of 34% and this estimated rate are state income
taxes, net of federal income tax benefit, and the effects of
goodwill amortization related to acquisitions structured as non-
taxable reorganizations which is non-deductible for federal income
taxes.
NOTE 5 - BORROWINGS
Effective August 31, 1995, the Company converted the two revolving
lines of credit totaling $750,000, provided by the Company's
primary bank, into a thirteen month term loan of $650,000. This
term loan bears interest at 11.5% per annum and requires a monthly
principal and interest payment of $49,835. This loan is
collateralized specifically by certain installment notes receivable
of the Company's wholly owned subsidiary, Check Express Finance,
Inc., is cross-collateralized with all other debt provided by the
Company's primary bank by substantially all the assets of the
Company, and is personally guaranteed by the Company's President
and CEO.
The cumulative amount remaining due as of September 30, 1995 under
the three term loans with the Company's primary bank was
$1,560,000.
The Company has obtained a series of three year term notes payable
to another bank, $500,000 in December 1994, $400,000 in April 1995,
$200,000 in June 1995, and $114,000 in October 1995, collateralized
by certain installment notes receivable of the Company's wholly
owned subsidiary, Check Express Finance, Inc. and personally
guaranteed the Company's President and CEO. The first three notes
payable bear interest at variable interest rates ranging from
10.625% per annum to 11.125%, to be adjusted annually, with the
October 1995 note bearing interest at a fixed rate of 11.125% per
annum. These four notes payable require an aggregate minimum
monthly principal and interest payment totaling $47,027. The
Company has made additional principal payments on these notes each
month to the extent that collections on the underlying installment
notes receivable collateralizing the notes payable have exceeded
the aggregate minimum monthly principal and interest payment on the
then outstanding notes payable to the bank. The cumulative amount
remaining due under the three term notes payable outstanding as of
September 30, 1995 was $468,000.
Also effective August 31, 1995, the Company and its wholly owned
subsidiary, Check Express Finance, Inc., entered into a $500,000
revolving credit agreement with another bank, and obtained an
initial advance thereunder of $500,000 under a two year term note
payable collateralized by certain installment notes receivable of
Check Express Finance, Inc. This term note payable bears interest
at a fixed rate of 10.75% per annum and requires a minimum monthly
interest and principal payment of $23,246. Additional principal
payments will be made monthly, as a result of early pay-downs or
payoffs of installment notes receivable collateralizing the loan,
to the extent the Borrowing Base calculated under the terms of the
credit agreement and based on the balances of the installment notes
receivable outstanding at each month end is less than the principal
balance of the term note payable. Check Express Finance, Inc. may
request subsequent advances, in minimum increments of $100,000, to
the extent that the revolving credit facility of $500,000 is not
fully accessed. The Company and the Company's President and CEO
have provided guarantees to the bank regarding this term note
payable.
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The Company converted $82,000 of the $108,000 outstanding as of
September 30, 1995, of its 11% per annum unsecured notes payable
which had balloon payments due November 1, 1995, to term notes with
the same monthly payments of principal and interest until the
balances are liquidated, October 1, 1997.
NOTE 6 - COMMITMENTS
The Company is engaged from time to time as plaintiff in small
claims court litigation relating to collection of returned checks
and other litigation to protect its service marks; however, such
litigation has not historically had any material effect on the
Company's financial condition and results of operations. As the
Company's franchise network expands, it is reasonably possible that
the Company will be engaged in litigation with one or more of its
franchisees from time to time.
The Company, through its wholly owned subsidiary, was previously
involved in litigation against a former employee of Check-X-Change.
The former employee had made five separate claims against Check-X-
Change related to breach of contract and untimely or non-payment of
compensation, several of which overlapped and were not independent
actions for separate damages. Arbitration of these claims was
completed during July 1995 and damages for certain of the claims
awarded. The damages awarded had no material adverse impact on the
Company's financial position.
NOTE 7 - SUBSEQUENT EVENTS
On October 16, 1995, the Company and Ace Cash Express, Inc.
(NASDAQ: AACE) ("Ace") announced they had signed a definitive
agreement for the purchase by Ace of all the outstanding stock of
Check Express, Inc. for $1.20 per share in cash ("the Merger
Agreement"). Completion of the transaction ("the Merger") is
subject to due diligence by Ace and subject to approval by the
shareholders of Check Express. A date for the Check Express
shareholders meeting will be announced upon completion of due
diligence and review of proxy materials by the Securities and
Exchange Commission ("the SEC"). The Company has capitalized costs
of $38,000 incurred during the quarterly period ended September 30,
1995, in connection with reaching this definitive agreement.
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PART I - ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Operations
Three Months Ended September 30, 1995 as Compared to Three Months
Ended September 30, 1994
Revenues. Revenues for the quarter ended September 30, 1995,
decreased 2%, or $36,000, to $1,895,000 as compared to $1,931,000
for the prior year period.
Check Cashing Service Fees. Company store revenues decreased 17%,
or $241,000, to $1,195,000. The decrease is comprised of a 13%
increase in comparable store revenues (22 stores which were open
for both of the full two periods compared) of $112,000, an increase
in revenues of $103,000 from 4 stores acquired after the second
quarter 1994 plus $2,000 from a newly opened store, offset by a
decrease in revenues from 11 stores sold of $384,000 and a decrease
in revenues from 5 stores closed of $73,000. See further
discussion of the causes of the increase in comparable store
revenues for the quarter included in the discussion, at page 13
hereof, of fluctuations in check cashing service fees for the nine
month periods ended September 30, 1995 and 1994.
Franchise Revenues. Franchise revenues for the 1995 period
increased 35%, or $133,000, to $515,000 over the same period in
1994. Initial franchise sales fees increased 253%, or $109,000, to
$152,000 for the period while continuing royalties increased 7%, or
$24,000, to $363,000.
Finance Revenues. The Company makes small consumer loans through
selected company owned stores and purchases at a discount loans
receivable on used automobiles through a limited number of dealers
in Florida. Finance revenues for the quarter ended September 30,
1995, were $207,000, an increase of $114,000, or 123%, over the
same period in 1994, primarily the result of an increase in used
automobile loans receivable. The Company's expansion of this
operation is dependent upon it's ability to successfully acquire
additional capital to fund the purchase of new loans and/or to add
selected used automobile dealers to its dealer network for
origination of loans.
Other Revenues. Other revenues decreased to ($23,000) from $20,000
in the prior period. The other revenue for the 1994 period
resulted from the gain on sale of a company-owned store, while the
reduction of other revenues for the same period in 1995 resulted
principally from losses on the write-down of certain fixed assets
related to stores closed.
Store Expenses. Store expenses for the 1995 period decreased 11%,
or $149,000, to $1,193,000. Salaries and benefits decreased 18%,
or $82,000; occupancy costs decreased 20%, or $42,000; returned
check write offs increased 43%, or $30,000; store depreciation and
amortization expense decreased 12%, or $11,000; other store
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expenses increased 7%, or $25,000; and area and regional expenses
decreased 45%, or $68,000. Salaries and benefits decreased as a
result of the net effect of an increase of $37,000 from the 22
comparable stores, an increase of 14% for those stores, plus
$38,000 from the 4 acquired stores and $3,000 from a newly opened
store, offset by a decrease of $121,000 from the 11 stores sold and
$39,000 from the 5 closed stores. Occupancy expenses decreased as
a result of fewer stores operating in the 1995 quarter than in
1994. The increase in returned check write-offs was comprised of
an increase of $57,000 contributed by the 22 comparable stores, an
increase of 163% for those stores, plus an increase of $2,000 from
the 5 closed stores and $1,000 from a newly opened store, offset
by a decrease of $28,000 from the 11 stores sold and a decrease of
$2,000 from the 4 acquired stores. A significant amount of these
uncollected returned items were checks cashed for established,
commercial account customers, most of which are small businesses.
These commercial customers have encountered financial difficulties
of one sort or another, some due to declining business, others as
a result of disputes between them and their customers over the
acceptability of their goods or services sold resulting in stop
payments being placed on checks issued to them by their customers
as payment for their goods and services. Management believes a
significant portion of these returned items will ultimately be
collected. However, due to the nature of the items, the related
disputes between the makers of the checks and our commercial
customers, collection of these items generally requires our
requesting the involvement of the State's Attorney. As a result,
the cycle time for successful collection of these returned items is
significantly longer than that, for example, for a payroll check or
even a personal check, which can typically be collected within a
period of several days. Depreciation and amortization decreased,
with increases of $13,000 from the 22 comparable stores, $5,000
from the 4 acquired stores and $2,000 from the newly opened store
being offset by a decrease of $26,000 from the 11 stores sold and
$5,000 from the 5 closed stores. The increase related to
comparable stores resulted from upgrades to older stores plus
redesign and upgrade of our training store, which is also utilized
for training of our franchisees. The increase in other store
expenses resulted primarily from an increase of $134,000 from the
22 comparable stores, an increase of 69% for those stores, with
significant contributors being bank charges, advertising, and the
corporate overhead expense allocation. This increase was offset by
a net decrease of $109,000 from the sold, closed, acquired and
newly opened stores. The decline in area and regional expenses is
comprised of decreases of $40,000 from the 11 stores sold, $18,000
from the 5 stores closed, $8,000 from the 4 acquired stores and
$2,000 from the 22 comparable stores. This decrease results
primarily from the elimination of two areas due to the sale of 5
stores in California in January 1995 and 2 stores in South Florida
during the fourth quarter 1994, plus other savings resulting from
stores sold and closed.
The Company implemented a management change in fourth quarter 1994
and assigned responsibility for management of the company-owned
stores to the operations support group, which also oversees
franchise store operations. This management change has resulted in
the reduction of area and regional expenses, primarily salaries.
The Company has focused on attracting and retaining quality
personnel at the store level, the front lines of the check cashing
operation, which has resulted in an increase in salaries at the
store level. Management believes that this investment in
attracting, training, motivating, and thereby retaining quality
store personnel will have a positive effect on the future results
of the check cashing operations.
Franchise Expenses. Franchise expenses for the 1995 period
increased 38%, or $139,000, to $501,000. Salaries and benefits
increased 44%, or $56,000, to $183,000. Advertising expense
increased 38%, or $18,000, to $65,000, due to marketing of
franchise kiosks targeted at convenience stores which was initiated
in the third quarter of 1994, and an increase in full-service
franchise marketing. Fees associated with the installation of the
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Company's proprietary check cashing computer system for new
franchisees increased 500%, or $15,000, to $18,000 due to a larger
number of new franchisee store locations in 1995 versus 1994.
Occupancy costs decreased 15%, or $3,000, to $17,000. Depreciation
and amortization expense decreased 23%, or $6,000, to $20,000 due
to a reduction in amortization of the excess purchase price
recorded with respect to the Check-X-Change acquisition, resulting
from the final adjustment of purchase accounting as of October 1,
1994, whereby goodwill was reduced by approximately $190,000.
Travel and lodging expense decreased 36%, or $41,000, to $73,000,
primarily due to a shift in timing for many franchise visits from
the third quarter in 1994 to the second quarter in 1995.
Professional services expenses increased 725%, or $29,000, to
$33,000, all related to an increase in activity related to
licensing, registering and protecting the Check Express USA and
Check-X-Change trade names, trademarks and other intellectual
property. Other expenses increased 152%, or $38,000, to $63,000,
primarily the result of increased telephone expenses and other
costs associated with additional sales and other personnel. The
corporate overhead allocation increased to $29,000 for 1995.
Finance Expenses. Expenses associated with the Company's small
consumer loan and auto loan finance activities increased 63%, or
$32,000, to $83,000 in 1995. Salaries and benefits increased 14%,
or $4,000, to $32,000, provision for loan losses increased 222%, or
$20,000, to $29,000, and other expenses increased 57%, or $8,000,
to $22,000. The increase in the provision for loan losses is due
to reserves established for losses anticipated related to
installment notes receivable purchased from a used automobile
dealer, who has recently experienced financial difficulties and, as
a result, gone out of business. As of October 31, 1995, the
Company has thirty eight active accounts purchased from this
dealer, with an aggregate balance due net of unearned discount of
approximately $65,000, approximately $56,000 of which is
contractually current within 30 days on their payments due. As of
the same date, the Company has ten accounts from this dealer
currently in repossession, such accounts having a balance due net
of unearned discounts of approximately $18,000. One of the other
two dealers with which the Company does business is assisting in
repossessing and either retailing or selling at auction the
automobiles underlying any of these installment notes receivable
which are or may become non-performing. The total balance due net
of unearned discount from the forty eight accounts purchased from
this dealer is approximately $83,000, or 3% of the Company's total
installment notes receivable as of September 30, 1995 of $2,692,000
and 132% of the reserve for doubtful accounts of $63,000
established as of September 30, 1995.
Headquarters Expenses. Headquarters expenses decreased 23%, or
$46,000, to $150,000, the net result of increases to components of
headquarters expenses offset by related increases in allocations of
certain expenses to the Company's operations.
Corporate overhead expenses, before allocations to operations,
increased 18%, or $38,000, to $244,000. Salaries and benefits
increased 32%, or $34,000, to $141,000, due to additional
personnel. Occupancy costs increased 38%, or $3,000, to $11,000 as
a result of an increase in the amount of rent expense allocated to
corporate overhead functions versus various operations functions.
Depreciation and amortization expense decreased 14%, or $3,000, to
$19,000. Other expenses increased 6%, or $4,000, to $73,000,
primarily due to additional expenses related to the 1994 business
expansion.
Interest Expense. Interest expense increased 40%, or $32,000, to
$111,000, primarily due to increased interest paid to banks and
individuals for loans made to help fund acquisitions, plus interest
paid to banks due to the growth in the Company's portfolio of auto
finance receivables. Approximately $63,000 of the interest expense
for the 1995 period is allocable to funding of the Finance
operation.
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Loss Before Income Taxes. Loss before income taxes increased 45%,
or $45,000, to $145,000 for the 1995 period as compared to $100,000
in 1994.
Income Taxes Benefit Benefit from income taxes for the 1995
period is $73,000 as compared to $51,000 in 1994, representing
estimated effective income tax rates of approximately 50% for both
periods. The effective tax rate for both periods is higher than
the statutory rate principally as a result of the amount of
goodwill amortization related to certain acquisition transactions
which occurred principally at the end of 1993, in relation to the
amounts of pre-tax income for these periods. Those acquisitions
were structured as non-taxable reorganizations, which resulted in
the amortization of intangibles for book accounting purposes being
non-deductible for income taxes. Acquisitions made by the Company
since then have been structured as taxable transactions, which
results in a deduction for income tax purposes of amortization of
intangibles.
Net Loss. The net effect of the matters discussed above is that
the net loss for the quarter ended September 30, 1995, increased to
$72,000 (a loss of $.01 per share on 5,060,982 weighted average
number of shares outstanding) as compared to $49,000 (a loss of
$.01 per share on 4,815,976 weighted average number of shares
outstanding) for the prior year period.
Nine Months Ended September 30, 1995 as Compared to Nine Months
Ended September 30, 1994
Revenues. Revenues for the nine months ended September 30, 1995,
increased 9%, or $480,000, to $6,014,000 as compared to $5,534,000
for the prior year period.
Check Cashing Service Fees. Company store revenues decreased 9%,
or $352,000, to $3,777,000. The decrease was comprised of an
increase in comparable store revenues (22 stores which were open
for both of the full two periods compared) of 7%, or $201,000, in
addition to an increase in revenues of $522,000 from 4 stores
acquired after the second quarter 1994, offset by a decrease in
revenues from 11 stores sold of $940,000 and a decrease in revenues
from 5 stores closed of $135,000.
The increase in comparable store revenues includes a decrease in
fees from the Company's income tax electronic filing and refund
anticipation loan programs of $64,000, the direct result of changes
made by the Internal Revenue Service with respect to processing of
income tax returns filed electronically and applying for a refund
anticipation loan. Check cashing fees in our 22 comparable stores
continue to show improvements over the prior year, the combined
result of a slight fee increase on certain types of checks cashed
and an increase in the face amount of checks cashed.
Franchise Revenues. Franchise revenues for the 1995 period
increased 21%, or $238,000, to $1,375,000, compared to $1,137,000
for the same period in 1994. Initial franchise sales fees
increased 90%, or $139,000, to $293,000 for the period while
continuing royalties increased 10%, or $99,000, to $1,082,000.
Finance Revenues. The Company makes small consumer loans through
selected company owned stores and purchases at a discount loans
receivable on used automobiles through a limited number of dealers
in Florida. Finance revenues for the nine months ended September
30, 1995, were $608,000, an increase of $397,000, or 188%, over the
same period in 1994, primarily the result of an increase in used
automobile loans receivable. The Company's expansion of this
operation is dependent upon it's ability to successfully acquire
additional capital to fund
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the purchase of new loans and/or to add selected used automobile
dealers to its dealer network for origination of loans.
Other Revenues. Other revenues increased to $253,000 from $57,000
in the prior period. The other revenue for the 1994 period
resulted primarily from the gain on sale of a company-owned store,
while the other revenues for the same period in 1995 resulted
principally from the gain on sale in January 1995 of 5 stores
located in California offset by losses on the write-down of certain
fixed assets related to stores closed during 1995.
Store Expenses. Store expenses for the 1995 period decreased 1%,
or $34,000, to $3,669,000. Salaries and benefits decreased $2,000,
or less than 1%; occupancy costs decreased 9%, or $49,000;
returned check write offs increased 6%, or $13,000; store
depreciation and amortization expense decreased 4%, or $9,000;
other store expenses increased 16%, or $171,000; and area and
regional expenses decreased 40%, or $158,000.
Salaries and benefits decreased as a result of the net effect of
increases of $128,000 from the 22 comparable stores, an increase of
16% for those stores, plus $203,000 from the 4 acquired stores and
$5,000 from a newly opened store, offset by decreases of $277,000
from the 11 stores sold and $61,000 from the 5 closed stores.
Occupancy expenses decreased as a result of fewer stores operating
in the 1995 period than in 1994. The increase in returned check
write-offs was comprised of increases of $88,000 contributed by the
22 comparable stores, a 71% increase for those stores, $8,000 from
the 4 acquired stores and $1,000 from a newly opened store, offset
by a decrease of $84,000 from the 11 stores sold. A significant
amount of these uncollected returned items were checks cashed for
established, commercial account customers, most of which are small
businesses. These commercial customers have encountered financial
difficulties of one sort or another, some due to declining
business, others as a result of disputes between them and their
customers over the acceptability of their goods or services sold
resulting in stop payments being placed on checks issued to them by
their customers as payment for their goods and services.
Management believes a significant portion of these returned items
will ultimately be collected. However, due to the nature of the
items, the related disputes between the makers of the checks and
our commercial customers, collection of these items generally
requires our requesting the involvement of the State's Attorney.
As a result, the cycle time for successful collection of these
returned items is significantly longer than that, for example, for
a payroll check or even a personal check, which can typically be
collected within a period of several days. Depreciation and
amortization decreased, resulting from increases of $22,000 from
the 22 comparable stores, $27,000 from the 4 acquired stores and
$3,000 from the newly opened store, offset by decreases of $56,000
from the 11 stores sold and $5,000 from the 5 closed stores. The
increase related to comparable stores resulted mainly from upgrades
to older stores plus redesign and upgrade of our training store,
which is also utilized for training of our franchisees. The
increase in other store expenses resulted primarily from an
increase of $232,000 from the 22 comparable stores, an increase of
39% for those stores, with significant contributors being bank
charges, advertising, and the corporate overhead expense
allocation. This increase was offset by a net decrease of $109,000
from the sold, closed, acquired and newly opened stores. The
decline in area and regional expenses reflects the net effect of an
increase of $1,000 related to a newly opened store offset by
decreases of $88,000 from the 11 stores sold, $34,000 from the 5
stores closed, $7,000 from the 4 acquired stores, and $30,000 from
the 22 comparable stores, comprised mainly of a reduction in
personnel costs offset by recruiting expenses related to the
management trainee program implemented during the first quarter
1995. The decrease in area and regional expenses results
primarily from
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the elimination of two areas due to the sale of 5 stores in
California in January 1995 and 2 stores in South Florida during the
fourth quarter 1994, plus other savings resulting from stores sold
and closed.
The Company implemented a management change in fourth quarter 1994
and assigned responsibility for management of the company-owned
stores to the operations support group, which also oversees
franchise store operations. This management change has resulted in
the reduction of area and regional expenses, primarily salaries.
The Company has focused on attracting and retaining quality
personnel at the store level, the front lines of the check cashing
operation, which has resulted in an increase in salaries at the
store level. Management believes that this investment in
attracting, training, motivating, and thereby retaining quality
store personnel will have a positive effect on the future results
of the check cashing operations.
Franchise Expenses. Franchise expenses for the 1995 period
increased 52%, or $430,000, to $1,259,000. Salaries and benefits
increased 30%, or $110,000, to $480,000. Advertising expense
increased 90%, or $80,000, to $169,000, due to marketing of
franchise kiosks targeted at convenience stores which was initiated
in the third quarter of 1994, and an increase in full-service
franchise marketing. Fees associated with the installation of the
Company's proprietary check cashing computer system for new
franchisees increased 100%, or $15,000, to $30,000 due to a larger
number of new franchisee store locations in 1995 versus 1994.
Occupancy expenses increased 22%, or $9,000, to $50,000.
Depreciation and amortization expense decreased 21%, or $16,000, to
$60,000 due to a reduction in amortization of the excess purchase
price recorded with respect to the Check-X-Change acquisition,
resulting from the final adjustment of purchase accounting as of
October 1, 1994, whereby goodwill was reduced by approximately
$190,000. Travel and lodging expenses increased 1%, or $2,000, to
$137,000. Professional services expenses increased 393%, or
$55,000, to $69,000, all related to an increase in activity related
to licensing, registering and protecting the Check Express USA and
Check-X-Change trade names, trademarks and other intellectual
property. Other expenses increased 75%, or $77,000, to $179,000,
primarily the result of increased telephone expenses and other
costs associated with additional sales and other personnel, plus
the net costs incurred by the Company in organizing and hosting an
annual convention for its franchise owners. The corporate overhead
allocation increased to $85,000 for 1995.
Finance Expenses. Expenses associated with the Company's small
consumer loan and auto loan finance activities increased $76,000,
or 63%, to $196,000 in 1995. Salaries and benefits increased
$28,000, or 46%, to $89,000, provision for loan losses increased
$30,000, or 150%, to $50,000, and other expenses increased 46%, or
$18,000, to $57,000. Approximately $20,000 of the increase in the
provision for loan losses is due to reserves established for losses
anticipated related to installment notes receivable purchased from
a used automobile dealer, who has recently experienced financial
difficulties and, as a result, gone out of business. As of October
31, 1995, the Company has thirty eight active accounts purchased
from this dealer, with an aggregate balance due net of unearned
discount of approximately $65,000, approximately $56,000 of which
is contractually current within 30 days on their payments due. As
of the same date, the Company has ten accounts from this dealer
currently in repossession, such accounts having a balance due net
of unearned discounts of approximately $18,000. One of the other
two dealers with which the Company does business is assisting in
repossessing and either retailing or selling at auction the
automobiles underlying any of these installment notes receivable
which are or may become non-performing. The total balance due net
of unearned discount from the forty eight accounts purchased from
this dealer is approximately $83,000, or 3% of the Company's total
installment notes receivable as of September 30, 1995 of $2,692,000
and 132% of the reserve for doubtful accounts of $63,000
established as of September 30, 1995. The other $10,000 of the
increase in provision for loan losses for the
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period results from growth of the reserve for doubtful accounts in
connection with the growth in the total portfolio of installment
notes receivable.
Headquarters Expenses. Headquarters expenses decreased $46,000, or
8%, to $506,000 in 1995, the net result of increases to components
of headquarters expenses offset by related increases in allocations
of certain expenses to the Company's operations.
Corporate overhead expenses, before allocations to operations,
increased 29%, or $178,000, to $782,000. Salaries and benefits
increased 32%, or $108,000, to $443,000, due to additional
personnel. Occupancy costs increased 50%, or $10,000, to $30,000
as a result of increased rent at the relocated corporate offices
and an increase in the amount of rent expense allocated to
corporate overhead functions versus various operations functions.
Depreciation and amortization expense increased 31%, or $14,000, to
$59,000, primarily due to additional telephone and computer
equipment. Other expenses increased 23%, or $46,000, to $250,000,
primarily due to additional expenses related to the 1994 business
expansion.
Interest Expense. Interest expense increased 84%, or $146,000, to
$319,000, primarily due to increased interest paid to banks and
individuals for loans made to help fund acquisitions, plus interest
paid to banks due to the growth in the Company's portfolio of auto
finance receivables. Approximately $152,000 of the interest
expense for the 1995 period is allocable to funding of the Finance
operation.
Income before Income Taxes. Income before income taxes decreased
59%, or $92,000, to $65,000 for the 1995 period as compared to
$157,000 in 1994.
Income Taxes. Provision for income taxes for 1995 period is
$33,000 as compared to $65,000 in 1994, representing estimated
effective income tax rates of approximately 50% and 41%,
respectively. The increase in effective tax rate for 1995 as
compared to 1994 and the relatively high effective tax rate for
both periods is principally the result of the increase in the
amount of goodwill amortization related to certain acquisition
transactions which occurred principally at the end of 1993, in
relation to the amounts of pre-tax income for these periods. Those
acquisitions were structured as non-taxable reorganizations, which
resulted in the amortization of intangibles for book accounting
purposes being non-deductible for income taxes. Acquisitions made
by the Company since then have been structured as taxable
transactions, which results in a deduction for income tax purposes
of amortization of intangibles.
Net Income. The net effect of the matters discussed above is that
net income for the nine months ended September 30, 1995, decreased
to $33,000 ($.01 per share on 5,019,970 weighted average number of
shares outstanding) as compared to $93,000 ($.02 per share on
4,806,597 weighted average number of shares outstanding) for the
prior year period.
Liquidity and Capital Resources.
In January 1993, the Company entered into an agreement with its
primary bank which provided the Company with a $400,000 operating
revolving credit line at prime plus 1.25% and a $270,000 five year
term loan (funded in April 1993) at a floating rate of prime plus
1.25%, with monthly principal and interest payments. The loan
terms contain covenants which require the Company to maintain a
tangible net worth of at least $1,000,000 and a ratio of total debt
(excluding subordinated or junior debt) to tangible net worth of
not more than 2.0 to 1.0. For such purposes, "tangible net worth"
means (i) the aggregate amount of assets (excluding intangible
assets),
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equity, and similar items reflected on the Company's balance sheet,
plus the amounts of any subordinated debt, junior debt and debt to
stockholders, less (ii) liabilities. The loans contain cross-
collateral provisions, are secured by substantially all of the
assets of the Company and are personally guaranteed by the
Company's President and CEO.
The Company owes its primary bank approximately $91,000 under a ten
year promissory note bearing interest at 8.5% per annum, due May
18, 2003. The note is secured by a mortgage on an improved site in
Tampa, Florida, which was purchased for $106,000 and at which the
Company operates a company-owned store.
In February 1994, the Company executed new loan agreements with its
primary bank which provided for an increase in the revolving credit
line to $500,000 and a new seven year $880,000 term loan at a fixed
rate of 8.25%, with monthly principal and interest payments.
Proceeds from the term loan were used to partially fund the
acquisitions and purchases of stores and for working capital for
the acquired stores. In August 1994, the Company obtained an
additional $250,000 in revolving credit line from its primary bank.
Effective August 31, 1995, the Company converted the two revolving
lines of credit totaling $750,000 into a thirteen month term loan
of $650,000. This term loan bears interest at 11.5% per annum and
requires a monthly principal and interest payment of $49,835. This
loan is collateralized specifically by certain installment notes
receivable of the Company's wholly owned subsidiary, Check Express
Finance, Inc., is cross-collateralized with all other debt provided
by the Company's primary bank by substantially all the assets of
the Company, and is personally guaranteed by the Company's
President and CEO.
The cumulative amount remaining due as of September 30, 1995 under
the three term loans with the Company's primary bank was
$1,560,000.
In May 1994, the Company obtained a revolving credit line in the
amount of $100,000 (subsequently increased to $200,000) from a
Washington bank to supplement cash required during peak check
cashing periods at its Washington stores. The terms of this
facility also include financial covenants measured using the stand
alone balances of the subsidiary and require compliance with all
covenants related to the debt provided by the Company's primary
bank in Florida. Amounts outstanding under this facility bear
interest at prime plus 2% and are personally guaranteed by the
Company's President and CEO.
The Company has obtained a series of three year term notes payable
to another bank, $500,000 in December 1994, $400,000 in April 1995,
$200,000 in June 1995, and $114,000 in October 1995, collateralized
by certain installment notes receivable of the Company's wholly
owned subsidiary, Check Express Finance, Inc. and personally
guaranteed the Company's President and CEO. The first three notes
payable bear interest at variable interest rates ranging from
10.625% per annum to 11.125%, to be adjusted annually, with the
October 1995 note bearing interest at a fixed rate of 11.125% per
annum. These four notes payable require an aggregate minimum
monthly principal and interest payment totaling $47,027. The
Company has made additional principal payments on these notes each
month to the extent that collections on the underlying installment
notes receivable collateralizing the notes payable have exceeded
the aggregate minimum monthly principal and interest payment on the
then outstanding notes payable to the bank. The cumulative amount
remaining due under the three term notes payable outstanding as of
September 30, 1995 was $468,000.
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<PAGE>
Also effective August 31, 1995, the Company and its wholly owned
subsidiary, Check Express Finance, Inc., entered into a $500,000
revolving credit agreement with another bank, and obtained an
initial advance thereunder of $500,000 under a two year term note
payable collateralized by certain installment notes receivable of
Check Express Finance, Inc. This term note payable bears interest
at a fixed rate of 10.75% per annum and requires a minimum monthly
interest and principal payment of $23,246. Additional principal
payments will be made monthly, as a result of early pay-downs or
payoffs of installment notes receivable collateralizing the loan,
to the extent the Borrowing Base calculated under the terms of the
credit agreement and based on the balances of the installment notes
receivable outstanding at each month end is less than the principal
balance of the term note payable. Check Express Finance, Inc. may
request subsequent advances, in minimum increments of $100,000, to
the extent that the revolving credit facility of $500,000 is not
fully accessed. The Company and the Company's President and CEO
have provided guarantees to the bank regarding this term note
payable.
The Company converted $82,000 of the $108,000 outstanding as of
September 30, 1995, of its 11% per annum unsecured notes payable
which had balloon payments due November 1, 1995, to term notes with
the same monthly payments of principal and interest until the
balances are liquidated, October 1, 1997.
In 1994, the Company expended approximately $1,090,000 in cash and
issued approximately $1,089,000 in notes as consideration for the
acquisition of 17 company stores, and received $90,000 in cash and
$1,030,000 in notes for the sale of six stores plus approximately
$170,000 in cash. Through September 30, 1995, the Company has
received approximately $982,000 in cash for 5 company stores sold
in January 1995.
In 1994, the Company expended approximately $285,000 in cash and
$65,000 under capital lease agreements for the purchase of a new
telephone system for its corporate headquarters and for the
purchase of additional computer equipment for the headquarters and
for the acquired stores. No amounts have been expended under
capital lease agreements through September 30, 1995.
In 1994, the Company expended $1,490,000 for its consumer loan and
auto finance receivables as compared to $98,000 in 1993. Through
September 30, 1995, the Company has expended approximately
$1,164,000 for similar installment notes receivable.
Because the Company's operations consist primarily of check cashing
and other financial services, its combined liquidity is readily
ascertainable. At September 30, 1995, 15% of the Company's
$10,607,000 in total assets consisted of cash.
The Company believes that with its present cash and credit lines it
has sufficient capital to continue its present level of operations.
Special Considerations
The Company's business is subject to various continuing risks,
including those described below.
Competition
As described above, the Company is in competition with various
other businesses that cash checks, sell franchises and make loans.
Many of the Company's competitors have significantly greater
financial resources
22
<PAGE>
than the Company. There can be no assurance that the Company will
be able to continue to compete successfully with such other
businesses.
Inherent Risks of Cash Business
The services provided by Check Express in its company-owned money
centers require each store to maintain a certain amount of cash on
hand which presents a risk of cash shortages from employee error
and theft. The Company has implemented controls and security
procedures to minimize this risk; however, the risk cannot be
totally eliminated. In addition, because the Company cashes
checks, it is subject to losses from returned checks. For fiscal
years ended December 31, 1994 and 1993, returned checks, net of
collections, and cash shortages totaled 6.1% and 4.0% of check
cashing service fees, respectively. Through September 30, 1995,
returned checks, net of collections, and cash shortages totaled
6.8% of check cashing service fees.
Inherent Risks of Finance Business
The Company is making small consumer loans and providing used
automobile financing to individuals, most of whom can be
characterized as high credit risks. Although the Company's actual
losses from its financing activities have been minimal to date,
there can be no assurance that the Company will be able to continue
to operate with similar loan loss experience in the future. The
Company recorded a $32,000 provision for loan losses in 1994 and a
$50,000 provision through September 30, 1995.
The used automobile financing installment notes receivable are
secured by the automobile and the Company has recourse agreements
with each dealer such that management (repossession and resale) of
the collateral supporting non-performing loans is the
responsibility of the dealers. The Company currently purchases
these installment notes receivable primarily from two used
automobile dealers located in Central Florida.
Management does not feel that this concentration of business with
two dealers represents a significant credit risk as the Central
Florida used automobile industry is very strong, primarily because
of the significance of the entertainment and recreation service
industry in this geographic region, with a significant number of
dealers. The dealer becomes part of the credit risk management
structure only at the point at which the loan is non-performing and
can not be recovered through the Company's collection efforts. At
this point the dealer is responsible under the recourse agreement
for repossessing and selling the automobile at auction in order to
recover proceeds to the extent practically feasible. This assumes
the dealer can not or does not wish to recondition and resell the
automobile again; the normal course is for this resale to occur and
the note related to the repossession to be settled by the dealer,
typically at an amount representing break even on the net
investment in the note at repossession. The new note related to
the resale may or may not be purchased from the dealer, in
accordance with the Company's normal purchase criteria for such
notes. In the event one of these dealers was unable to fulfill his
commitments with respect to the recourse agreement, the Company
would utilize the other dealer to manage non-performing loans. The
other dealer would be asked to repossess, recondition and resell
the automobile, which would be both in the best interest of the
dealer, due to the profit motive involved, and the best interest of
the Company. The likelihood of both dealers experiencing
difficulty at the same time is considered remote. If that were to
occur, the Company would still have the ability to mitigate losses
by working with other dealers in the market, many of whom are
familiar to management personnel of the finance operation, to
assist with management of non-performing loans.
23
<PAGE>
Government Regulation
There are some states which currently regulate check cashing
stores. Regulations vary from state to state and range from simple
minimum licensing requirements to limits on check cashing fees.
The Company and several of its franchisees operate in states which
have regulations affecting check cashing stores. In addition,
federal and some state regulations require the reporting of certain
currency transactions. The Company began selling its own money
orders in September of 1992 and operates under money order
licensing regulations promulgated by the States of Florida and
Indiana. The Company's finance activities are subject to numerous
local, state and federal regulations. There can be no assurance
that the Company will not be materially adversely affected by
legislation or regulations currently in existence or which may be
enacted in the future.
Seasonality
The check cashing business is seasonal, in large part the result of
the timing of income tax refunds and the fees earned from the
cashing of income tax refund and refund anticipation loan checks.
Historically, most of the revenues for these seasonal services are
earned within the six months ending June 30. The timing of the
sale of new franchises is impossible to predict and can have a
material effect on the results of operations of a particular
quarter. However, the Company believes that the growth in
continuing royalties, combined with the growth in finance revenues,
may serve to mitigate the seasonality effect of the income tax
season and the timing of new franchise sales. Accordingly, the
results of operations for any one quarter are not necessarily
indicative of the results of operations which may be realized for
the full year.
Effect of Inflation
The Company believes that inflation does not currently have a
material effect on its results of operations.
24
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is engaged from time to time as plaintiff in
small claims court litigation relating to collection of
returned checks and other litigation to protect its
service marks; however, such litigation has not
historically had any material effect on the Company's
financial condition and results of operations. As the
Company's franchise network expands, it is reasonably
possible that the Company will be engaged in litigation
with one or more of its franchisees from time to time.
The Company, through its wholly owned subsidiary, was
previously involved in litigation against a former
employee of Check-X-Change. The former employee had
made five separate claims against Check-X-Change related
to breach of contract and untimely or non-payment of
compensation, several of which overlapped and were not
independent actions for separate damages. Arbitration
of these claims was completed during July 1995 and
damages for certain of the claims awarded. The damages
awarded had no material adverse impact on the Company's
financial position.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
Definitive Merger Agreement With Ace Cash Express, Inc.
Signed
On October 16, 1995, the Company and Ace Cash Express,
Inc. (NASDAQ: AACE) ("Ace") announced they had signed
a definitive agreement for the purchase by Ace of all
the outstanding stock of Check Express, Inc. for $1.20
per share in cash ("the Merger Agreement"). Completion
of the transaction ("the Merger") is subject to due
diligence by Ace and subject to approval by the
shareholders of Check Express. A date for the Check
Express shareholders meeting will be announced upon
completion of due diligence and review of proxy
materials by the Securities and Exchange Commission
("the SEC").
25
<PAGE>
In conjunction with the signing of the Merger Agreement,
certain shareholders of the Company executed a
Shareholder Agreement and Irrevocable Proxy which, among
other things, grants Ace the irrevocable right to vote
their shares of Common Stock in connection with the
Merger. Ace filed a Form 3 and a Schedule 13-D with the
SEC, both dated October 20, 1995, in order to report the
granting of such rights to vote the Common Stock of the
Company in connection with the Merger.
Item 6. Exhibits and Reports on Form 8-K.
<TABLE>
<CAPTION>
(a) Exhibits
Exhibit No. Description of
Exhibits
<S> <C> <C>
2.2 Agreement and Plan of Merger among Ace Cash
Express, Inc. (a Texas corporation),
Ace Acquisition Corporation (a Florida
corporation) and Check Express, Inc. (a
Florida Corporation) dated October 13, 1995.
2.2(a) Agreement and Release by and among Ace Cash
Express, Inc., a Texas corporation,
Check Express, Inc., a Florida Corporation, and
Larry Lang dated October 13, 1995.
2.2(b) Shareholder Agreement and Irrevocable Proxy dated
October 13, 1995, by and between
Ace and Larry Lang.
2.2(c) Shareholder Agreement and Irrevocable Proxy dated
October 13, 1995, by and between
Ace and Stephen L. Selka.
2.2(d) Shareholder Agreement and Irrevocable Proxy dated
October 12, 1995, but effective
as of October 13, 1995, by and between Ace and
Patrick J. McEnany.
2.2(e) Shareholder Agreement and Irrevocable Proxy dated
October 5, 1995, but effective
as of October 13, 1995, by and between Ace and H.
Jeffrey Voss.
2.2(f) Shareholder Agreement and Irrevocable Proxy dated
October 5, 1995, but effective
as of October 13, 1995, by and between Ace and
American National Bank of Cheyenne.
2.2(g) Shareholder Agreement and Irrevocable Proxy dated
October 10, 1995, but effective
as of October 13, 1995, by and between Ace and
Joseph J. Wozniak and Janet J.
Wozniak, Jt/Ten.
10.19 Seafirst Bank Promissory Note.
10.23 Employment Agreement with Larry F. Lang.
10.24 SouthTrust Bank of West Florida Installment Note.
10.25 Southern Commerce Bank Promissory Note.
10.26 Southern Commerce Bank Promissory Note.
10.27 Republic Bank Credit Agreement and Promissory Note.
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
None.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, this Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CHECK EXPRESS, INC.
November 14, 1995 By: /s/ Decker A. Todd
---------------------------------
Decker A. Todd, Vice President of
Finance and Chief Financial
Officer
27
