<PAGE>
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 June 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
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(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 5,061,003 shares of common stock outstanding as of
July 31, 1995.
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<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 June 30, 1995 and December 31, 1994 3
Interim Unaudited Consolidated Statements of
Income for the three months and six months ended
June 30, 1995 and June 30, 1994 4
Interim Unaudited Consolidated Statements of
Cash Flows for the six months ended June 30, 1995
and June 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 10
<CAPTION>
PART II - OTHER INFORMATION
<S> <C>
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on form 8-K 20
Signatures 21
</TABLE>
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<TABLE>
<CAPTION>
CHECK EXPRESS, INC. AND SUBSIDIARIES
INTERIM UNAUDITED CONSOLIDATED BALANCE SHEETS
June 30,
December 31,
1995
1994
------------
------------
<S> <C>
<C>
ASSETS
CURRENT ASSETS
Cash $ 1,237,974
$ 1,539,527
Accounts receivable, net 991,537
634,945
Installment notes receivable, net 1,183,066
753,472
Notes receivable 89,932
73,977
Recoverable income taxes -
41,334
Prepaid expenses and other current assets 404,121
389,287
------------
------------
Total current assets 3,906,630
3,432,542
Notes receivable 911,835
953,099
Property and equipment, net 1,630,804
1,652,499
Accounts receivable, net 122,500
122,500
Installment notes receivable, net 1,436,552
825,418
Intangibles, net 2,245,408
2,906,695
Other assets, net 118,195
133,102
------------- ------------
Total assets $ 10,371,924
$ 10,025,855
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $ 1,534,746
$ 1,280,000
Notes payable other 191,507
338,944
Current maturities of capital lease obligations 29,044
35,118
Current maturities of senior long term debt 161,141
159,031
Current maturities of subordinated long term debt 276,715
298,880
Accounts payable 180,689
197,942
Unredeemed money orders 1,149,546
968,195
Income taxes payable 33,267
-
Other liabilities 289,709
296,898
Unearned income 133,581
39,911
------------
------------
Total current liabilities 3,979,945
3,614,919
Capital lease obligations 52,537
65,880
Senior long term debt 1,001,621
1,078,874
Subordinated long term debt 724,542
799,342
Unearned income 193,500
193,500
Accrued franchise commissions 24,750
24,750
Deferred income taxes 180,117
173,708
------------
------------
Total liabilities 6,157,012
5,950,973
COMMITMENTS & CONTINGENCY -
-
STOCKHOLDERS' EQUITY
Common stock - authorized, 10,000,000 shares, $.004 par value;
5,061,003 and 4,973,503 shares issued and outstanding at
June 30, 1995 and December 31, 1994, respectively 20,244
19,894
Additional paid-in-capital 3,688,803
3,653,903
Retained earnings 505,865
401,085
------------
------------
Total stockholders' equity 4,214,912
4,074,882
------------
------------
Total liabilities and stockholders' equity $ 10,371,924
$ 10,025,855
============
============
</TABLE>
The accompanying Notes to Interim Unaudited Consolidated Financial Statements
are an integral part of these consolidated financial statements.
3
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<TABLE>
<CAPTION>
CHECK EXPRESS, INC. AND SUBSIDIARIES
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF
INCOME
Three Months Ended
June 30, Six Months Ended June 30,
----------------------------- --------------------------
1995
1994 1995 1994
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----------- ----------- -----------
<S> <C>
<C> <C> <C>
REVENUES:
Check cashing service fees $ 1,231,548 $
1,238,465 $ 2,582,184 $ 2,693,376
Franchise fees 111,500
73,800 141,000 111,800
Franchise royalties 365,603
325,249 719,497 643,538
Finance revenues 225,009
79,855 400,577 118,360
Other revenues ( 16,200)
35,178 276,148 36,635
-----------
----------- ----------- -----------
Total revenues 1,917,460
1,752,547 4,119,406 3,603,709
EXPENSES:
Store Expenses (includes $76,676, $70,757,
$151,234 and $149,139, respectively, of
depreciation and amortization) 1,211,222
1,146,187 2,475,986 2,361,337
Franchise expenses (includes $19,198, $25,332,
$40,323 and $50,467, respectively, of depreciation
and amortization) 374,094
242,784 757,822 467,075
Finance expenses (includes $638, $863, $1,275 and
$1,246, respectively, of depreciation and
amortization) 57,654
38,246 112,693 68,857
Headquarters expenses (includes $19,795, $13,674,
$39,270 and $22,792, respectively, of depreciation
and amortization) 160,049
195,778 355,544 355,431
Interest expense 104,177
55,355 207,362 94,056
-----------
----------- ----------- -----------
Total expenses 1,907,196
1,678,350 3,909,407 3,346,756
Income before income taxes 10,264
74,197 209,999 256,953
Income taxes 6,051
33,361 105,219 115,629
-----------
----------- ----------- -----------
Net income $ 4,213 $
40,836 $ 104,780 $ 141,324
===========
=========== =========== ===========
Earnings per share $ .00 $
.01 $ .02 $ .03
===========
=========== =========== ===========
Weighted average number of shares of common
stock outstanding 5,023,915
4,815,976 4,999,125 4,806,597
===========
=========== =========== ===========
</TABLE>
The accompanying Notes to Interim Unaudited Consolidated Financial Statements
are an integral part of these consolidated financial statements.
4
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<TABLE>
<CAPTION>
CHECK EXPRESS, INC. AND
SUBSIDIARIES
INTERIM UNAUDITED CONSOLIDATED STATEMENTS
OF CASH FLOWS
Six
Months Ended June 30,
--------------------------------
1995
1994
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<S> <C>
<C>
Cash flows from operating activities:
Net income $
104,780 $ 141,324
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization
232,102 223,644
Provision for losses on receivables
17,204 12,762
Deferred income taxes
6,409 96,273
(Gain) loss on sale of assets (
275,780) -
Changes in assets and liabilities (exclusive of
net assets acquired and disposed)
(Increase) decrease in:
Accounts receivable (
356,592) 92,705
Recoverable income taxes
41,334 54,092
Prepaid expenses and other current assets
5,393 ( 60,587)
Other assets (
962) ( 32,537)
Increase (decrease) in:
Accounts payable (
17,253) ( 93,894)
Unredeemed money orders
181,351 29,524
Income taxes payable
33,267 -
Other liabilities (
7,189) 86,140
Unearned income
93,670 23,916
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Net cash provided by (used in) operating activities
57,734 573,362
Cash flows from investing activities:
Installment notes receivable, net (
1,067,490) ( 717,574)
Notes receivable
25,309 ( 277,095)
Capital expenditures (
256,795) ( 710,672)
Net cash received (paid) for entities acquired and disposed
982,133 ( 1,160,076)
------------ -----------
Net cash (used in) provided by investing activities (
321,785) ( 2,865,417)
------------ -----------
Cash flows from financing activities:
Borrowings under notes payable banks
670,000 450,000
Repayment of notes payable to banks (
415,254) -
Borrowings under notes payable other
- 334,725
Repayment of notes payable other (
147,437) ( 95,506)
Borrowings under long term debt
- 1,265,000
Repayment of borrowings under long term debt (
172,108) ( 123,261)
Borrowings under capital lease obligations
- 73,039
Repayment of borrowings under capital lease agreements (
19,417) ( 20,330)
Proceeds from issuances of common stock for
exercise of stock options
35,250 12,675
------------ -----------
Net cash (used for) provided by financing activities (
48,966) 1,896,342
------------ -----------
Net increase (decrease) in cash (
301,553) ( 395,713)
Cash at beginning of period
1,539,527 2,630,521
------------ -----------
Cash at end of period $
1,237,974 $ 2,234,808
============ ===========
</TABLE>
The accompanying Notes to Interim Unaudited Consolidated Financial Statements
are an integral part of these consolidated financial statements.
5
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<TABLE>
<CAPTION>
CHECK EXPRESS, INC. AND SUBSIDIARIES
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June
30,
---------------------------
1995 1994
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<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ 24,210 $
4,800
Interest $ 207,362 $
99,683
</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 June 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 June 30, 1995, and the results of operations
and cash flows for the periods then ended, have been included.
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.
Earnings per Share
Earnings per share (EPS) for the periods ended June 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 stock method were anti-dilutive in the
aggregate for both the primary and fully diluted earnings per
calculations.
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.
7
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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 six months ended June 30, 1994
assuming the transaction was effective as of January 1, 1994.
<TABLE>
<CAPTION>
Unaudited
-------------
1994
-------------
<S> <C>
Revenues $ 3,927,053
Income before income taxes 312,954
Net income 179,082
Earnings per share .04
</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 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 four 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 1994 and 1993, 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 store which was acquired in November 1993 (see
above). 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.
8
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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.
These stores were previously acquired in December 1993 (see above).
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. The amount of such drafts outstanding and
guaranteed by the Company at December 31, 1994 was $18,917.
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 $1,000,000 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.
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.
9
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PART I - ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
OPERATIONS
----------
Three Months Ended June 30, 1995 as Compared to Three Months Ended
-------------------------------------------------------------------
June 30, 1994
-------------
Revenues. Revenues for the quarter ended June 30, 1995, increased
9%, or $164,000, to $1,917,000 as compared to $1,753,000 for the
prior year period.
Check Cashing Service Fees. Company store revenues decreased less
than 1%, or $6,000, to $1,232,000. The decrease is comprised of an
18% increase in comparable store revenues (22 stores which were
open for both of the full two periods compared) of $152,000, an
increase in revenues of $213,000 from 4 stores acquired after the
second quarter 1994 plus $1,000 from a newly opened store, offset
by a decrease in revenues from 9 stores sold of $321,000 and a
decrease in revenues from 5 stores closed of $51,000. See further
discussion of the causes of the increase in comparable store
revenues for the quarter included in the discussion, at pages 12
through 13 hereof, of fluctuations in check cashing service fees
for the six month periods ended June 30, 1995 and 1994.
Franchise Revenues. Franchise revenues for the 1995 period
increased 20%, or $78,000, to $477,000 over the same period in
1994. Initial franchise sales fees increased 5%, or $38,000, to
$112,000 for the period while continuing royalties increased 12%,
or $40,000, to $366,000.
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 June 30, 1995,
were $225,000, an increase of $145,000, or 181%, 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 ($16,000) from $35,000
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 increased 6%,
or $65,000, to $1,211,00. Salaries and benefits held virtually
consistent at $383,000 for each period; occupancy costs decreased
8%, or $15,000; returned check write offs decreased 31%, or
$26,000; store depreciation and amortization expense increased
10
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8%, or $6,000; other store expenses increased 36%, or $116,000;
and area and regional expenses decreased 15%, or $16,000.
Salaries and benefits remained the same as a result of the net
effect of an increase of $46,000 from the 22 comparable stores, an
increase of 18% for those stores, plus $78,000 from the 4 acquired
stores and $2,000 from a newly opened store, offset by a decrease
of $106,000 from the 9 stores sold and $20,000 from the 5 closed
stores. Occupancy expenses decreased as a result of fewer stores
operating in the 1995 quarter than in 1994. The decrease in
returned check write-offs was comprised of a decrease of $4,000
contributed by the 22 comparable stores, $26,000 from the 9 stores
sold and $3,000 from the 5 closed stores, offset by an increase of
$7,000 from the 4 acquired stores. Depreciation and amortization
increased, with $13,000 of the increase from the 22 comparable
stores, $11,000 from the 4 acquired stores and $1,000 from the
newly opened store, offset by a decrease of $19,000 from the 9
stores sold. 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 $96,000 from the 22 comparable
stores, an increase of 57% for those stores, with significant
contributors being bank charges, tax program expenses, advertising,
and the corporate overhead expense allocation. The remainder of
the increase in other store expenses reflects the net change from
acquired and newly opened stores offset by sold and closed stores.
The decline in area and regional expenses reflects the net effect
of a $22,000 decrease from the 9 stores sold plus a reduction of
$4,000 related to stores closed, offset by an increase of $10,000
related to the 22 comparable stores, comprised mainly of recruiting
expenses related to a management training program implemented
during the first quarter 1995 and an increase in travel expenses
associated with visits to these stores by senior operations
management personnel.
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 54%, or $131,000, to $374,000. Salaries and benefits
increased 16%, or $21,000, to $154,000. Advertising expense
increased 141%, or $38,000, to $64,000, 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. Depreciation and amortization expense
decreased 24%, or $6,000, to $19,000 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
increased 200%, or $19,000, to $28,000, primarily due to the
increased number of franchise stores and a higher number of new
franchise store openings in the 1995 period as compared to 1994.
Other expenses increased 39%, or $18,000, to $64,000, primarily the
result of increased telephone expenses and other costs associated
with additional sales personnel.
Finance Expenses. Expenses associated with the Company's small
consumer loan and auto loan finance activities increased 53%, or
$20,000, to $58,000 in 1995. Salaries and benefits increased 63%,
or $10,000,
11
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to $26,000, provision for loan losses increased 71%, or $5,000, to
$12,000, and other expenses increased 33%, or $5,000, to $20,000.
Headquarters Expenses. Headquarters expenses decreased 18%, or
$36,000, to $160,000, the net result of increases to components of
headquarters expenses offset by allocations of certain expenses to
the Company's operations.
Corporate overhead expenses, before allocations to operations,
increased. Salaries and benefits increased 26%, or $30,000, to
$146,000, due to additional personnel. Occupancy costs increased
42%, or $3,000, to $10,000 as a result of increased rent at the
relocated corporate offices. Depreciation and amortization expense
increased 43%, or $6,000, to $20,000, primarily due to additional
telephone and computer equipment. Other expenses increased 24%, or
$17,000, to $87,000, primarily due to additional expenses related
to the 1994 business expansion.
Interest Expense. Interest expense increased 90%, or $49,000, to
$104,000, primarily due to increased interest paid to banks and
individuals for loans made to help fund acquisitions and interest
paid to banks due to the growth in the Company's portfolio of auto
finance receivables. Approximately $34,000 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
86%, or $64,000, to $10,000 for the 1995 period as compared to
$74,000 in 1994.
Income Taxes. Provision for income taxes for 1995 period is $6,000
as compared to $33,000 in 1994, representing estimated effective
income tax rates of approximately 50% and 45%, 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 quarter ended June 30, 1995, decreased to $4,000
($.00 per share on 5,023,915 weighted average number of shares
outstanding) as compared to $41,000 ($.01 per share on 4,815,976
weighted average number of shares outstanding) for the prior year
period.
Six Months Ended June 30, 1995 as Compared to Six Months Ended June
--------------------------------------------------------------------
30, 1994
--------
Revenues. Revenues for the six months ended June 30, 1995,
increased 14%, or $515,000, to $4,119,000 as compared to $3,604,000
for the prior year period.
Check Cashing Service Fees. Company store revenues decreased less
than 4%, or $111,000, to $2,582,000. 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 5%, or $88,000, in
addition to an increase in revenues of $418,000 from
12
<PAGE>
4 stores acquired after the second quarter 1994, offset by a
decrease in revenues from 9 stores sold of $555,000 and a decrease
in revenues from 5 stores closed of $62,000.
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. These changes also resulted in a delayed timing
of tax refund check cashing. Our check cashing fees were down in
the first quarter as a result, but, as management believed would
occur, these fees were recovered during the second quarter 1995.
Historically, the bulk of the tax refund activity occurred in
February and March, with a less significant amount trailing into
April. Additionally, many of the refund checks we cashed were
refund anticipation loan checks. In 1995, the bulk of our tax
refund checks cashed were in April and May, with some trailing into
June, and more were refund checks issued by the United States
Treasury Department. Check cashing fees for the months of May and
June 1995 increased 26% and 29%, respectively, over the comparable
months in 1994, with June leveling back out to an increase of 14%.
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 plus a general
improvement in check cashing which management believes is a result
of the investments being made in attracting, training, and
retaining quality personnel at the store level, the front lines of
the check cashing operation.
Franchise Revenues. Franchise revenues for the 1995 period
increased 14%, or $105,000, to $860,000 over the same period in
1994. Initial franchise sales fees increased 25%, or $29,000, to
$141,000 for the period while continuing royalties increased 12%,
or $76,000, to $719,000.
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 six months ended June 30,
1995, were $401,000, an increase of $283,000, or 240%, 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 increased to $276,000 from $37,000
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 increased 5%,
or $115,000, to $2,476,000. Salaries and benefits increased
$80,000, or 10%; occupancy costs decreased 2%, or $7,000;
returned check write offs decreased 11%, or $17,000; store
depreciation and amortization expense increased 1%, or $2,000;
other store expenses increased 21%, or $147,000; and area and
regional expenses decreased 38%, or $90,000.
Salaries and benefits remained the same as a result of the net
effect of an increase of $90,000 from the 22 comparable stores, an
increase of 17% for those stores, plus $163,000 from the 4
acquired stores and $2,000 from a newly opened store, offset by a
decrease of $156,000 from the 9 stores sold and $22,000 from the 5
closed stores. Occupancy expenses decreased as a result of fewer
stores operating in the 1995 period than
13
<PAGE>
in 1994. The decrease in returned check write-offs was comprised
of an increase of $31,000 contributed by the 22 comparable stores,
a 35% increase for those stores, plus an increase of $10,000 from
the 4 acquired stores, offset by a decrease of $56,000 from the 9
stores sold and $2,000 from the 5 closed stores. Depreciation and
amortization increased, with $9,000 of the increase from the 22
comparable stores, $22,000 from the 4 acquired stores and $1,000
from the newly opened store, offset by a decrease of $30,000 from
the 9 stores sold. 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 $98,000 from the 22 comparable
stores, an increase of 24% for those stores, with significant
contributors being bank charges, tax program expenses, advertising,
and the corporate overhead expense allocation. The remainder of
the increase reflects the net change from acquired and newly opened
stores offset by sold and closed stores. The decline in area and
regional expenses reflects the net effect of a $48,000 decrease
from the 9 stores sold, a reduction of $15,000 related to stores
closed, and a decrease of $27,000 related to 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 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 62%, or $291,000, to $758,000. Salaries and benefits
increased 22%, or $54,000, to $243,000. Advertising expense
increased 128%, or $72,000, to $128,000, 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. Depreciation and amortization expense
decreased 20%, or $10,000, to $40,000 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
increased 60%, or $20,000, to $53,000, primarily due to the
increased number of franchise stores and a higher number of new
franchise store openings in the 1995 period as compared to 1994.
Other expenses increased 51%, or $39,000, to $116,000, primarily
the result of increased telephone expenses and other costs
associated with additional sales personnel.
Finance Expenses. Expenses associated with the Company's small
consumer loan and auto loan finance activities increased $44,000,
or 64%, to $113,000 in 1995. Salaries and benefits increased
$24,000, or 73%, to $53,000, provision for loan losses increased
$10,000, or 91%, to $21,000, and other expenses increased 34%, or
$10,000, to $39,000.
Headquarters Expenses. Headquarters expenses remained relatively
constant at $355,000 for each period, the net result of increases
to components of headquarters expenses offset by allocations of
certain expenses to the Company's operations.
14
<PAGE>
Corporate overhead expenses, before allocations to operations,
increased. Salaries and benefits increased 31%, or $72,000, to
$301,000, due to additional personnel. Occupancy costs increased
58%, or $7,000, to $19,000 as a result of increased rent at the
relocated corporate offices. Depreciation and amortization expense
increased 70%, or $16,000, to $39,000, primarily due to additional
telephone and computer equipment. Other expenses increased 31%, or
$42,000, to $177,000, primarily due to additional expenses related
to the 1994 business expansion.
Interest Expense. Interest expense increased 120%, or $113,000,
to $207,000, primarily due to increased interest paid to banks and
individuals for loans made to help fund acquisitions and interest
paid to banks due to the growth in the Company's portfolio of auto
finance receivables. Approximately $90,000 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
18%, or $47,000, to $210,000 for the 1995 period as compared to
$257,000 in 1994.
Income Taxes. Provision for income taxes for 1995 period is
$105,000 as compared to $116,000 in 1994, representing estimated
effective income tax rates of approximately 50% and 45%,
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 six months ended June 30, 1995, decreased to
$105,000 ($.02 per share on 4,999,215 weighted average number of
shares outstanding) as compared to $141,000 ($.03 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), 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 $93,000 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
15
<PAGE>
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.
The cumulative amount remaining due as of June 30, 1995 under the
two term loans with the Company's primary bank was $940,000.
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%.
In December 1994, the Company obtained a $500,000 term note payable
to a bank, collateralized by certain installment notes receivable
of its wholly owned subsidiary, Check Express Finance, Inc. This
note payable bears interest at a variable interest rate, to be
adjusted annually, currently at 10.625%, with a three year term and
monthly interest and principal payments of $16,317. The Company
pledged certain installment notes receivable as collateral for this
loan. The Company's President also personally guarantees the
facility. The Company obtained an additional $400,000 in April
1995 and an additional $200,000 in June 1995, under similar terms,
in term notes payable from the same bank. The cumulative amount
remaining due under these three term notes payable as of June 30,
1995 was $685,000.
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 June 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 June 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
June 30, 1995, the Company has expended approximately $1,067,000
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 June 30, 1995, 12% of the Company's $10,372,000
in total assets consisted of cash.
16
<PAGE>
The Company believes that with its present cash and credit lines it
has sufficient capital to continue its present level of operations.
In order to achieve management's goal of expanding operations
significantly, including the planned growth of its consumer loan
and auto finance activities, the Company will require additional
capital resources. Although there can be no assurance that the
Company will be able to secure such financing, management intends
to actively pursue additional sources of capital.
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 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 June 30, 1995,
returned checks, net of collections, and cash shortages totaled
5.5% 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
$21,000 provision through June 30, 1995.
The used automobile financing installment notes receivable are
secured by the automobile and the Company has recourse agreements
in place 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
17
<PAGE>
is responsible under the recourse agreement in place 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 in place, 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.
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 quarter ending March 31 which, historically, has
been the Company's most profitable quarter. However, see
discussion of the impact of changes made by the IRS in 1995 under
"Check Cashing Service Fees." 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.
18
<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.
------------------------------
Extension of Warrants
---------------------
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.
19
<PAGE>
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.
Discussions Regarding Possible Transaction Involving the
Company
On August 3, 1995, the Company announced that it has
entertained preliminary discussions with several parties
regarding the possible acquisition of the Company by one of
such parties. Such an acquisition, if consummated, could be
structured as a purchase, a merger, or otherwise. However, no
agreement has been reached with any party regarding any
transaction, and there is no assurance that any agreement will
be entered into. The Company does not expect to make any
further public comment on this matter unless and until an
agreement is entered into with an acquiring party.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------------------
None.
20
<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.
August 12, 1995 By: Decker A. Todd
----------------- ---------------------------------
Decker A. Todd
Vice President of Finance and
Chief Financial Officer
21
