UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___TO___
COMMISSION FILE NUMBER 0-20774
ACE CASH EXPRESS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-2142963
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1231 GREENWAY DRIVE, SUITE 800
IRVING, TEXAS 75038
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (972) 550-5000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of September 14, 2000, 9,955,763 shares of Common Stock were outstanding. As
of such date the aggregate market value of voting stock (based upon the last
reported sales price in The Nasdaq Stock Market) held by nonaffiliates of the
registrant was approximately $78,041,908.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference from the
registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Ace Cash Express, Inc. ("ACE" or the "Company") is a significant provider of
retail financial services in the United States. The Company is also the largest
owner, operator, and franchisers, of check cashing stores in the United States.
As of August 31, 2000, the Company had a total network of 1,084 stores in 33
states and the District of Columbia, consisting of 921 Company-owned stores and
163 franchised stores. The Company's growth strategy is to integrate
acquisitions, new store openings, and franchising in new and existing markets
and to develop new products for introduction into the existing store base. The
Company's general objective is to provide a full range of retail financial
services and transaction processing in its markets. Additionally, it is the
Company's objective to develop and maintain the largest network of stores in
markets where the Company operates.
ACE stores offer check cashing services and other retail financial services
at competitive rates in clean, convenient settings. Services include cashing
payroll checks, government checks, and insurance drafts; selling money orders;
and providing money transfer services using the MoneyGram network. Many
Company-owned stores also offer bill-payment services, lottery and lotto
tickets, small consumer loans, and other retail financial and transaction
processing services.
INDUSTRY OVERVIEW
The primary industry in which ACE operates is check cashing. Industry sources
indicate that there are approximately 6,000 check cashing stores nationally.
Though there is limited public information available, the Company believes that
there are six other check cashing companies operating or franchising over 100
stores, three companies that operate or franchise between 50 and 100 locations,
with the remaining companies operating less than 50 stores.
The Company believes that it and other check cashing companies have grown by
offering services that banks do not provide, and operating at locations and
during hours that are more convenient than those traditionally offered by banks.
Unlike many banks, check cashing stores are willing to assume the risk that
checks they cash will "bounce." For instance, it is not unusual for a bank to
refuse to cash a check for a customer who does not maintain a deposit account
with the bank and to require its depositors to maintain sufficient funds in an
account to cover a check to be cashed or wait several days for the check to
clear. As a result, the Company believes check cashing stores provide an
attractive alternative to customers without bank accounts or with relatively
small account balances. Although these customers might save money by depositing
their checks in a bank and waiting for them to clear, many prefer paying a fee
to take advantage of the convenience and availability of immediate cash offered
by check cashing stores.
The core business of check cashing stores is generally cashing checks for a
fee. These fees are intended to provide the check casher with a profit after
covering operating expenses, including any interest expense incurred by the
check casher on the funds advanced to customers between the time checks are
cashed and the time the checks clear through the banking system. The risk a
check cashing store assumes upon cashing a check is that the check will be
uncollected because of insufficient funds, stop payment orders, or fraud. In
order to minimize this risk and the losses associated with uncollected checks,
many check cashing stores cash only payroll or government entitlement checks,
charge higher fees, or have stricter approval procedures for cashing personal
checks. ACE does not promote the cashing of personal checks in its stores. For
the fiscal year ended June 30, 2000, less than 1% of the checks cashed by the
Company were one-party personal checks.
In addition to check cashing services, most check cashing stores offer
customers a range of other services, including access to small consumer loans,
bill payments, money orders, and wire transfers of cash. Some check cashing
stores also offer lottery and lotto tickets, public transportation passes,
copying and fax transmission services, and postage stamps.
<PAGE>
The Company believes that the deregulation of the banking and savings and
loan industry has increased the role played by check cashing stores in providing
basic financial transaction services to low-income and middle-income customers.
At the same time, the Company believes that competition, regulatory scrutiny and
complexity are contributing to consolidation of the industry. The Company's
strategy is to position itself to benefit from industry consolidation and the
competitive advantages available to large operators and franchisors of retail
financial services.
GROWTH STRATEGY
ACE's growth strategy consists principally of combining acquisitions and new
store openings with the objective of having the largest number of retail
financial services locations in each of its markets and developing new products
for introduction into the existing store base. ACE defines its target markets as
cities of 100,000 or more. The Company has expanded from 276 Company-owned
stores in 10 metropolitan areas as of June 30, 1993, to 915 Company-owned stores
in 272 cities as of June 30, 2000. In fiscal 2000, the Company opened 99 newly
constructed stores, acquired 36 stores, franchised 56 stores, and closed 18
company-owned stores. The Company currently anticipates that it will construct
and open 50 stores, primarily in existing markets, during the fiscal year ending
June 30, 2001.
<PAGE>
The following table illustrates the development of Company-owned stores
since 1994 by showing the number of stores open in each market area at the
end of each of the indicated periods:
<TABLE>
<CAPTION>
COMPANY-OWNED STORES
-------------------------------------------------------
June 30,
-------------------------------------------------------
MARKET AREA 2000 1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
TEXAS:
Dallas/Fort Worth/East Texas 129 122 117 114 112 103 98
Houston/Galveston/Corpus Christi 112 83 76 74 72 60 55
San Antonio/Austin/El Paso 68 59 51 42 28 24 23
MARYLAND/WASHINGTON D.C./VIRGINIA:
Baltimore/Washington D.C./
Northern VA/Norfolk/Virginia Beach 93 81 77 72 74 71 62
FLORIDA:
Jacksonville/Orlando/Palm Beach/Tampa 90 73 60 46 38 - -
ARIZONA;
Phoenix/Tuscon 73 69 59 58 46 37 4
GEORGIA:
Atlanta/Albany/Augusta/Macon/
Savannah 54 52 50 47 47 49 42
COLORADO:
Denver/Colorado Springs/Pueblo 52 51 45 44 41 39 30
NORTH & SOUTH CAROLINA
Charlotte/Charleston/Columbia/
Greenville/Spartanburg/Orangeburg 34 29 17 16 16 15 11
CALIFORNIA:
Los Angeles/Van Nuys/San Bernadino 30 16 9 - - - -
TENNESSE:
Memphis/Nashville 26 22 18 15 5 2 -
LOUISIANA:
New Orleans/Baton Rouge/Shreveport 25 25 25 25 19 19 14
INDIANA:
Indianapolis 25 23 14 9 4 - -
WASHINGTON:
Seattle/Tacoma/Everette 14 12 10 8 6 - -
NEVADA:
Las Vegas 14 11 4 - - - -
OKLAHOMA:
Oklahoma City 12 14 13 13 12 12 -
OHIO:
Cleveland 11 10 10 10 8 7 4
MISSOURI:
St. Louis 11 10 6 6 3 3 -
OREGON:
Portland 9 8 5 5 - - -
NEW MEXICO:
Albuquerque 8 8 7 7 7 7 -
ARKANSAS:
Little Rock 8 7 7 6 6 4 -
UTAH:
Salt Lake City/Layton/Ogden 5 3 - - - - -
KANSAS:
Wichita 4 3 2 - - - -
ALABAMA:
Birmingham/Homewood 3 4 1 - - - -
PENNSYLVANIA:
Pittsburg 3 - - - - - -
KENTUCKY:
Paducah /Murray 2 3 - - - - -
--- --- --- --- --- --- ---
TOTAL 915 798 683 617 544 452 343
=== === === === === === ===
</TABLE>
<PAGE>
Acquisitions. During fiscal 2000, the Company acquired 36 stores in eight
separate transactions. The Company believes its experience with acquisitions
permits it to successfully integrate additional acquisitions. Of the 915 ACE
company-owned stores currently in operation, 325, or 36%, have been acquired
stores. The Company does not have any current plan or expectation as to the
number of stores that it may acquire during the fiscal year ending June 30,
2001. The Company intends to continue searching for strategic opportunities in
both existing and new markets.
FRANCHISE OPERATIONS
With the acquisition of Check Express, Inc. and its wholly owned franchising
subsidiaries in February 1996, the Company became one of the largest franchisors
of check cashing stores in the United States. In fiscal 1996, ACE created the
ACE Franchise Group to service and market new ACE franchises. ACE franchises are
marketed through a commissioned employee sales force, supplemented by
advertising in newspapers, trade journals, and other media. As of June 30, 2000,
there were 157 Company-franchised stores open and operating in 27 states, as
follows:
Number of stores
----------------
Texas 48
California 15
Louisiana 13
Florida 12
Oklahoma 11
Ohio 9
South Carolina 7
Georgia 6
North Carolina 5
Colorado 3
Missouri 3
Oregon 3
Arizona 2
Arkansas 2
Connecticut 2
Indiana 2
Kentucky 2
Tennessee 2
Washington 2
Other states (8) 8
---
Total 157
===
The Company intends to continue its expansion through the sale of new
franchises and the opening of additional units under existing franchise
agreements. The Company is actively marketing several types of ACE franchises
depending on the style of business being conducted. These include a standard
store franchise, a store-within-a-store (or "kiosk") franchise, and a conversion
franchise that permits an existing check cashing business to convert to an ACE
franchisee. The Company opened 56 new franchised stores, sold six franchised
stores, closed six franchised stores, and acquired seven former franchised
stores during fiscal 2000. The majority of franchised stores operate under the
"ACE" name, by license from the Company.
CUSTOMERS AND SERVICES
Management believes the Company's core customer group is composed primarily
of individuals whose average age is 29 and who rent their house or apartment and
hold a wide variety of jobs in the service sector or are clerical workers,
craftsmen, and laborers. These customers tend to change jobs and residences more
often than average, have annual family incomes under $30,000, often pay their
bills with money orders, and prefer the availability of immediate cash provided
by cashing checks at the Company's stores.
<PAGE>
The following table reflects the major categories of services that ACE
currently offers and the revenues (in thousands) from these services for the
indicated fiscal years:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------- --------------------------------------------------------
REVENUE CATEGORY 2000 1999 1998 1997 1996
-------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Check cashing fees $ 89,641 $ 78,839 $ 68,987 $ 62,835 $ 51,327
Loan fees and interest 17,872 14,257 10,137 5,703 2,462
Bill payment services 9,447 8,394 4,146 2,197 1,320
Money transfer services 8,944 7,951 6,082 5,749 4,740
Money order fees 7,032 5,332 2,879 2,757 2,413
New customer fees 2,164 2,296 2,207 2,051 1,338
Franchise revenues 2,537 2,117 1,665 1,398 633
Other fees 2,999 3,128 4,091 4,702 4,726
-------- -------- -------- -------- --------
Total revenue $140,636 $122,314 $100,194 $ 87,392 $ 68,959
======== ======== ======== ======== ========
</TABLE>
Check cashing. ACE's primary business is cashing checks for a fee. The
principal type of check the Company cashes is a payroll check. The Company also
cashes government assistance, tax refund, and insurance checks or drafts.
Subject to market conditions at different locations, the Company's check cashing
fees for payroll checks approximate 2.2% of the face amount of the check. The
Company imposes a surcharge for cashing out-of-state checks, handwritten checks,
money orders, tax refund checks, and insurance checks or drafts. Unlike many of
its competitors, the Company displays its check cashing fees in full view of its
customers on a "menu board" in each store and provides a detailed receipt for
each transaction. Although the Company has established guidelines for approving
check cashing transactions, it has no preset limit on the size of the checks it
will cash.
If a check cashed by the Company is not paid for any reason, the Company
accounts for the amount of the check as a loss in the period in which it is
returned. ACE then transfers the check to its collection department, which
contacts the maker and payee of each returned check and, if necessary, commences
legal action. The collection department utilizes an automated tracking system on
the Company's central computer system to monitor the status of all returned
items. See "Selected Financial Data -- Collections Data."
Loan services. The Company is engaged in the small consumer loan business,
because the Company believes that many consumers may have limited access to
other sources of consumer credit. During the year ended June 30, 2000, the
Company offered payday loans at various of its locations, and offered short-term
bank loans made by Goleta National Bank at certain of its locations. See " --
Bank Loans" below.
Where permitted by law, the Company has offered a service commonly referred
to in the check-cashing industry as a "payday loan." That service consists of
providing a customer cash in exchange for the customer's check (in the amount of
that cash plus a service fee), with an agreement to defer the presentment or
deposit of that check until the customer's next payday, usually a period of two
to four weeks. ACE has been a licensed provider of such payday loans in
Arkansas, California, Colorado, Florida, Indiana, Kansas, Kentucky, Louisiana,
Missouri, Nevada, New Mexico, North Carolina, Oklahoma, Ohio, Oregon, Tennessee,
Washington, and Washington D.C. During the year ended June 30, 2000, the average
amount of cash provided to a customer in such a transaction was approximately
$220, and the fee received by the Company was approximately $31.07. As of June
30, 2000, this service was offered in 45 of the Company's stores. The Company
has now ceased to offer this service at almost all of its stores.
The payday loan service has been subject to extensive regulation. As
required, each ACE store that has offered payday loans has been licensed under
state laws, which establish allowable fees and other charges on these loans to
consumers. In addition, many states regulate the maximum amounts and maturities
of these loans.
Certain jurisdictions in which the Company operates do not permit payday
lending; one of those states is Texas, the state in which the Company has the
most locations. Further, the regulations in the various states in which payday
lending is permitted are not uniform. Because the Company believes that its
business would benefit by making a single or standard loan product available to
its customers in all jurisdictions, it is now offering short-term loans from
Goleta National Bank at almost all of the ACE locations.
<PAGE>
Bill-payment services. The Company's stores serve as payment locations for
customers to pay their utility, telephone, and other bills to third parties.
Upon acceptance of the customer's payment, the Company remits the amount owed to
the third-party payee under an agreement with that payee and either receives a
service fee from the payee or collects a fee from the consumer.
Under a Bill-Payment Processing and Funds Transfer Services Agreement (the
"MoneyLine Agreement") with Travelers Express Company, Inc. ("Travelers
Express") and its affiliate MoneyLine Express, Inc. ("MoneyLine"), the Company
acts as an agent for MoneyLine, which has agreements with various third-party
payees for consumer services. The Company's services and obligations under the
MoneyLine Agreement are similar to those in its other bill-payment agreements
directly with the payees, though consumer payments accepted by the Company are
transmitted to MoneyLine instead of directly to the payees. The MoneyLine
Agreement permits the Company to offer its customers bill-payment services to
virtually any third-party payee.
Money transfer services. ACE is an agent for the transmission and receipt of
wire transfers through the MoneyGram network. Through this network, ACE
customers can transfer funds electronically to any of approximately 15,000
MoneyGram locations nationwide (including other ACE stores) and over 30,000
locations worldwide. MoneyGram Payment Systems, Inc. establishes the fees for
this service, and the Company is paid a percentage of the fees it collects from
customers as a commission and remits the balance to MoneyGram Payment Systems,
Inc.
Money orders. The Company sells money orders issued by Travelers Express in
denominations up to $1,000. These money orders are generally used by the
Company's customers for bill payments, rent payments, and other general
disbursements. The Company sold 12.3 million, 14.5 million, and 14.1 million
money orders during the 2000, 1999, and 1998 fiscal years, respectively. The
fees charged for money orders depend on local market conditions and the size of
the money order. The Company remits the face amount of each money order sold to
Travelers Express. ACE's money order revenues include that portion of the fees
retained by the Company.
New customer fees. The Company charges a one-time fee for new check cashing
customers to cover the costs of initial set-up in the ACE customer database and
establishment of an identification verification system.
Franchise revenues. The Company's franchise revenues consist of royalties,
initial franchise fees, and buyback fees from its franchisees. There were 157
Company-franchised stores in operation as of June 30, 2000.
Other services and products. In many Company-owned stores, ACE also offers a
variety of other retail financial products and services to its customers,
including lottery and lotto ticket sales, public transportation passes, copying
and fax transmission services, postage stamps, and prepaid long-distance
telephone cards.
STORE OPERATIONS AND NEW STORE ECONOMICS
The Company's objective is to locate its Company-owned stores in highly
visible, accessible locations and to operate the stores during convenient hours.
The Company attempts to locate stores on high traffic streets or intersections,
in many cases in or near destination shopping centers. The Company's stores
occupy 1,100 square feet on average and are located in strip shopping centers,
free-standing buildings, and kiosks located inside major retail stores. The
Company is focused on increasing the market's awareness of ACE by using
consistent signage and design at each store location. All but two of the
Company-owned stores are leased.
Normal business hours of the Company-owned stores are from 9:00 a.m. until
7:00 p.m., Monday through Thursday, 9:00 a.m. until 8:00 p.m. on Friday, and
9:00 a.m. until 6:00 p.m. on Saturday. Currently, 160 stores are also open on
Sunday, generally from 10:00 a.m. until 5:00 p.m., and several stores are open
24 hours. The business hours of any store may be changed due to local market
conditions.
<PAGE>
The Company's store construction and facilities planning staff reviews and
negotiates lease agreements for store locations, supervises the construction of
new stores, the remodeling of existing stores, and performs lease management
once the leases are executed. Although the size and shape of a Company-owned
store may vary, and since many of the stores are built out of existing space,
the work area of each store is a modular-designed unit that can be customized to
meet the requirements of each location while giving a uniform appearance. These
modular units may be moved from one location to the next, thus reducing the
costs associated with opening new stores and relocating existing stores.
The tables below show the average annual store revenues and the average store
contribution for Company-owned stores which were opened and remain open as of
June 30, 2000.
<TABLE>
<CAPTION>
AVERAGE STORE REVENUES
YEAR ENDED JUNE 30,
NUMBER OF (IN THOUSANDS)
STORES OPEN AT ------------------------------------------------------------
YEAR OPENED: JUNE 30, 2000 2000 1999 1998 1997 1996
----------------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
1991 and earlier 145 $198.1 $185.1 $167.2 $158.6 $151.7
1992 22 232.0 228.0 202.0 177.4 154.2
1993 37 200.6 186.9 159.8 143.1 127.8
1994 35 177.3 168.2 148.8 134.0 114.4
1995 34 164.9 156.7 126.5 113.2 85.8
1996 29 184.2 164.8 141.1 107.6 33.8
1997 40 152.6 138.4 103.0 32.3 -
1998 59 124.0 93.0 25.6 - -
1999 90 82.4 28.6 - - -
2000 99 22.8 - - - -
-----------------
590
Acquired stores 325
-----------------
915
=================
</TABLE>
<TABLE>
<CAPTION>
AVERAGE STORE CONTRIBUTION (1)
YEAR ENDED JUNE 30,
NUMBER OF (IN THOUSANDS)
STORES OPEN AT ------------------------------------------------------------
YEAR OPENED: JUNE 30, 2000 2000 1999 1998 1997 1996
----------------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
1991 and earlier 145 $ 86.5 $ 76.9 $64.7 $58.9 $54.6
1992 22 112.7 109.3 88.8 69.8 52.7
1993 37 81.3 76.0 58.4 47.6 35.9
1994 35 68.1 58.6 45.3 43.3 26.8
1995 34 52.3 44.4 23.4 18.5 (1.4)
1996 29 71.4 51.9 36.1 8.6 (7.9)
1997 40 34.4 26.6 (1.5) (12.4) -
1998 59 19.8 6.2 (13.9) - -
1999 90 (19.2) (19.5) - - -
2000 99 (16.5) - - - -
-----------------
590
Acquired stores 325
-----------------
915
=================
</TABLE>
-----------------------------------------------------
(1) "Average store contribution" equals revenues less direct store expenses
and store-related depreciation and amortization. Direct store expenses
consist of store salaries and benefits, occupancy costs (rent,
maintenance, taxes and utilities), returned checks net of collections,
cash shortages, armored security costs, loan losses,and bank charges.
Direct store expenses exclude region or corporate overhead,
depreciation, and amortization expenses.
The capital cost of opening a new store varies depending on the size and type
of store. During fiscal 2000, the Company opened 99 Company-owned stores at an
average capital cost of approximately $61,000 per store.
<PAGE>
There can be no assurance that the Company's stores will continue to generate
the same level of revenues or revenue growth as in the past or that any new or
acquired store will perform at a level comparable to any of the Company's
existing stores.
ADVERTISING AND MARKETING
ACE markets and promotes service and product offerings by a variety of
methods. The Company believes that its most effective marketing is through
in-store programs, combining the selling efforts of store personnel with various
selling messages on point-of-purchase material. The Company emphasizes courteous
service and trains service associates to recognize and develop good
relationships with customers. All check cashing customers join the ACE PLUS gold
card retention program, which rewards members with benefits like free check
cashing commensurate with the volume of check cashing done at ACE. Also, through
its branding with standardized signage and store design, the Company attempts to
foster an image that attracts customers and inspires consumer confidence. The
Company also benefits from vendor-sponsored media advertising in some markets.
SUPERVISION AND TRAINING
The Company's operations are organized in "regions," which generally
correspond to the market areas in which ACE operates its stores. Each region has
a regional vice president ("RVP"), who reports to the Executive Vice President
of Operations and is responsible for the operations, administration, training,
and supervision of the Company-owned stores in his or her region. The Company
currently has 11 RVP's who supervise an average of 83 stores each. The Company
currently has 56 district supervisors, each of whom reports to the RVP for his
or her region and is directly responsible for the general management of 6 to 30
stores within his or her territory. These district supervisors are responsible
for operations, training, scheduling, marketing, and staff motivation. Each
store manager reports to a district supervisor, has direct responsibility over
his or her store's operations, and supervises the service associates who staff
the stores.
Service associates, managers, district supervisors, and RVP's must complete
formal training programs conducted by the Company. ACE has a Company-wide
training program, with higher-level training conducted at the corporate office
and new-hire training conducted in each regional office by corporate-trained
personnel. The purpose of this training, which covers topics ranging from
customer service to loss reduction, is to improve the Company's delivery of
products and services.
POINT-OF-SALE SYSTEM
ACE has developed and implemented a proprietary personal computer based
point-of-sale system, which has been fully operational in all Company-owned
stores since 1991. In addition to other management information and control
functions, ACE's point-of-sale system allows the Company to:
1) capture, analyze, and update on a daily basis data relating to customers and
transactions, including the makers of cashed checks, which allows the Company to
provide service associates with on-demand access to current information for use
in approving check cashing transactions;
2) utilize an automated decision
methodology to guide service associates to take appropriate actions and to
better manage risk in check cashing transactions;
3)monitor daily revenues by product or service on a company, regional, per
store, and per employee basis;
4) monitor and manage daily store exception reports, which record, for example,
any cash shortages and late store opening times;
5) identify cash differences between bank statements and the Company's records
(such as differences resulting from missing items and deposits);
6) determine, on a daily basis, the amount of cash needed at each store
location, allowing centralized cash management personnel to maintain the optimum
amount of cash inventory in each store;
7) reduce the risk of transaction errors by, for example, automatically
calculating check cashing and other transaction fees;
8) provide products and services in a standardized and efficient manner, which
the Company believes allows it to operate its stores with fewer personnel than
many of its competitors (with many of the Company's stores being operated by
only one person);
<PAGE>
9) electronically transmit information and documents to third-party providers of
services or products offered at the stores; and
10)facilitate compliance with regulatory requirements.
The data captured by the point-of-sale system is transmitted daily from each
store to a centralized database maintained at ACE's headquarters and is
automatically integrated into its general ledger system.
SECURITY
All Company-owned store employees work behind bullet-resistant Plexiglas and
steel partitions. Each Company-owned store's security measures include safes,
alarm systems monitored by third parties, teller area entry control, perimeter
opening entry detection, and tracking of all employee movement in and out of
secured areas. All centers are currently using centralized security; acquired
centers are typically converted within one month of acquisition. The centralized
system includes the following security measures in addition to those described
above: identical alarm systems in all stores, remote control over alarm systems,
arming/disarming and changing user codes, and mechanically and electronically
controlled time-delay safes.
Since ACE's business requires its stores to maintain a significant supply of
cash, the Company is subject to the risk of cash shortages resulting from theft
and employee errors. Although the Company has implemented various programs to
reduce these risks and provide security for its facilities and employees, there
can be no assurance that these problems will be eliminated. During the 2000 and
1999 fiscal years, cash shortages from employee errors and from theft were
approximately $2.8 million (2.0% of revenues) and $2.5 million (2.0% of
revenues), respectively.
The Company's point-of-sale system allows management to detect cash shortages
on a daily basis. In addition to other procedures, district supervisors conduct
random audits of each Company-owned store's cash position and inventories on an
unannounced, random basis.
Daily transportation of currency and checks is provided by nationally
recognized armored carriers, such as Loomis, Fargo & Company. ACE employees are
not authorized to transport currency or checks.
EMPLOYEES
At June 30, 2000, ACE employed 2,046 persons: 1,092 store employees, 677
store managers, 56 district supervisors, 11 regional vice presidents, 117
regional support personnel, 81 corporate employees, and 12 franchise personnel.
Third-party firms hired by the Company conduct background checks of the
Company's new hires.
The Company considers its employee relations to be good. ACE's employees are
not covered by a collective bargaining agreement, and the Company has never
experienced any organized work stoppage, strike, or labor dispute. Generally,
the Company's employees are not bonded.
COMPETITION
The Company believes that the principal competitive factors in the check
cashing industry are location, customer service, fees, convenience, and range of
services offered. The Company faces intense competition and believes that the
check cashing market is becoming more competitive as the industry matures and
consolidates. The Company competes with other check cashing stores, grocery
stores, banks, savings and loans, short-term consumer lenders, other financial
services entities, and any retail businesses that cash checks, sell money
orders, provide money transfer services, or other similar financial services.
Certain competitors of the Company, other than check cashing stores, cash checks
without charging a fee under limited circumstances. Some of the Company's
competitors that are not check cashing companies have larger and more
established customer bases and substantially greater financial, marketing, and
other resources. There is no assurance that the Company will be able to compete
successfully with its competitors.
<PAGE>
TRADEMARKS
The Company has obtained several federal trademark registrations, including
for "A-C-E America's Cash Express(R)", "ACE(R)" and its logo design.
REGULATION
General. The Company is subject to regulation in several jurisdictions in
which it operates, including jurisdictions that regulate check cashing fees or
require the registration of check cashing companies or money transmission
agents. The Company is also subject to federal and state regulation relating to
the reporting and recording of certain currency transactions. Further, the
Company has been subject to regulation in the jurisdictions in which it has
offered the service commonly referred as a "payday loan."
State Regulations. The Company operates in 18 states that have licensing
and/or fee regulations regarding check cashing: Arkansas, Arizona, California,
Florida, Georgia, Indiana, Kentucky, Louisiana, Maryland, Nevada, North
Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Utah, Washington, and
the District of Columbia. The Company is licensed in each of the states in which
a license is currently required for it to operate as a check cashing company. To
the extent these states have adopted ceilings on check-cashing fees, those
ceilings are in excess or equal to the fees charged by the Company.
The adoption of check cashing fee ceilings in additional jurisdictions could
have an adverse effect on the Company's business, and existing fee ceilings
could restrict the ability of the Company to expand its check-cashing operations
into certain states.
In some jurisdictions, check cashing companies or money transmission agents
are required to meet minimum bonding or capital requirements and are subject to
record-keeping requirements. In addition, in those jurisdictions in which the
Company has operated as a "payday lender," it has been licensed as such and has
had to comply with the regulations governing payday loans. Those various
licenses, and compliance with those various regulations, may not be necessary
for the offering of the Bank Loans at the Company's locations. The Bank Loans
are subject primarily to federal regulation applicable to Goleta as a lending
national bank.
Federal Regulations. Under the Bank Secrecy Act regulations of the U.S.
Department of the Treasury (the "Treasury Department"), transactions involving
currency in an amount greater than $10,000 or the purchase of monetary
instruments for cash in amounts from $3,000 to $10,000 must be reported. In
general, every financial institution, including the Company, must report each
deposit, withdrawal, exchange of currency or other payment or transfer, whether
by, through or to the financial institution, that involves currency in an amount
greater than $10,000. In addition, multiple currency transactions must be
treated as single transactions if the financial institution has knowledge that
the transactions are by, or on behalf of, any person and result in either cash
in or cash out totaling more than $10,000 during any one business day.
Management believes that the Company's point-of-sale system and
employee-training programs are essential to the Company in complying with these
statutory requirements.
The Money Laundering Suppression Act of 1994 added a section to the Bank
Secrecy Act requiring the registration of "money services businesses," like the
Company, that engage in check cashing, currency exchange, money transmission, or
the issuance or redemption of money orders, traveler's checks, and similar
instruments. The purpose of the registration is to enable governmental
authorities to better enforce laws prohibiting money laundering and other
illegal activities. The registration requirement was suspended pending the
adoption of regulations implementing the statute, and in May 1997 the Financial
Crimes Enforcement Network of the Treasury Department ("FinCEN") proposed
regulations for comment. In August 1999 FinCEN announced the adoption of final
implementing regulations, effective September 20, 1999. The regulations require
money services businesses to register with the Treasury Department, by filing a
form to be adopted by FinCEN, by December 31, 2001 and to re-register at least
every two years thereafter. The regulations also require that a money services
business maintain a list of names and addresses of, and other information about,
its agents and that the list be made available to any requesting law enforcement
agency (through FinCEN). That agent list must first be maintained by January 1,
2002 and must be updated at least annually. Though FinCEN must adopt further
regulations and procedures to more fully implement these requirements, based on
these regulations, the Company does not believe that compliance with these
requirements will have any material impact on its operations.
<PAGE>
In March 2000 FinCEN adopted additional regulations, implementing the Bank
Secrecy Act, that are also addressed to money services businesses. In pertinent
part, those regulations will require money services businesses like the Company
to report suspicious transactions involving at least $2,000 to FinCEN. The
regulations generally describe three classes of reportable suspicious
transactions -- one or more related transactions that the money services
business knows, suspects, or has reason to suspect (1) involve funds derived
from illegal activity or are intended to hide or disguise such funds, (2) are
designed to evade the requirements of the Bank Secrecy Act, or (3) appear to
serve no business or lawful purpose. FinCEN indicated that it would subsequently
provide guidance in the form of examples of reportable transactions, but (so far
as the Company is aware) no such examples have yet been published. Again, this
reporting requirement will not apply until December 31, 2001, and because of the
Company's point-of-sale system and employee-training programs, the Company does
not believe that compliance will have any material impact on its operations.
In May 1997 FinCEN proposed for comment one other set of regulations
implementing the Bank Secrecy Act that could affect the Company. That proposed
set of regulations requires "money transmitters" and their "agents" to report
and keep records, and verify the senders of transactions in currency or monetary
instruments of at least $750, but not more than $10,000, in connection with the
transfer of funds to a person outside the United States. Because the Company is
an agent in the MoneyGram network and an agent for MoneyLine regarding
bill-payment services, the Company would be an agent of money transmitters under
this proposed set of regulations. In its August 1999 announcement, FinCEN
indicated that the proposed regulations regarding transmission of funds to
persons outside the United States was being deferred and provided no further
explanation.
Bank Loans. As a national bank, Goleta is subject to regulation, supervision,
and regular examination by various federal regulatory authorities, including the
Office of the Comptroller of the Currency (the "OCC"). To the extent an
examination involves review of the Bank Loans and related processes, the OCC or
other regulatory authority may request, and the Company will typically grant,
access to certain of the Company's locations, personnel, and records regarding
Bank Loans. The OCC is conducting a scheduled examination of Goleta during
September and October 2000, and the Company is cooperating with the OCC's
requests for information regarding Bank Loans. The Company does not anticipate
any material adverse consequences as the result of the current examination of
Goleta or the Company's involvement in that examination. But the Company's
ability to offer Bank Loans at its locations could be affected by any adverse
determination by the OCC or by other actions or determinations made from time to
time by any of the authorities that regulate Goleta.
From time to time local and national media have published or broadcast
stories that are critical of payday loans and other small short-term consumer
loans. Those stories focus on the cost to a consumer for that service or loan,
which is higher than the interest typically charged by credit-card issuers to a
more creditworthy consumer. This difference in credit cost is more significant
if a consumer does not promptly repay the payday loan or other short-term loan,
but renews and extends (or "rolls over") that loan for one or more additional
short-term (e.g., two-week) periods. Those stories -- which have not been
concerned solely with ACE's products or practices -- typically advocate
governmental action to eliminate or restrict payday loans and other similar
loans. From time to time over the past two years, bills have been introduced in
the United States Congress and in certain state legislatures, and regulatory
authorities have proposed or publicly addressed the possibility of proposing
regulations, that would so eliminate or restrict payday loans and other similar
loans. So far as the Company is aware, however, none of those bills or proposals
have made any significant progress in the legislative or regulatory process.
Though the Company does not currently anticipate any legislative or regulatory
action that would prohibit or materially restrict its loan services, the
occurrence of any such prohibition or restriction in the future could have a
material adverse effect on the Company's business.
RELATIONSHIPS WITH THE MONEY ORDER AND MONEYGRAM SUPPLIERS
Money Order Agreement. In April 1998, the Company signed a money order
agreement with Travelers Express which became effective December 17, 1998. Under
this five-year agreement, the Company exclusively sells Travelers Express money
orders that bear the Company's logo. In conjunction with this agreement and the
MoneyLine Agreement (which also has a five-year term), the Company received $3
million from Travelers Express in April 1998, received $400,000 in each of April
1999 and April 2000, and is entitled to receive an additional $400,000 per year
for the next three years. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and Note
4 of Notes to Consolidated Financial Statements. If the money order agreement is
terminated under certain circumstances before the expiration of its five-year
term, the Company will be obligated to repay a portion of the $3 million and the
annual amounts received from Travelers Express. The money order agreement with
Travelers Express does not allow an extended deferral of remittances of money
order proceeds. The Company's payment and other obligations to Travelers Express
under the money order agreement are secured by a subordinated lien on the
Company's assets in accordance with the Amended Collateral Trust Agreement
described under "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Credit Facilities."
<PAGE>
Existing MoneyGram Services. The Company is an agent for the receipt and
transmission of wire transfers of money through the MoneyGram network. The
Company's agency relationship is currently governed by the 1996 MoneyGram Master
Agreement, as amended (the "Existing MoneyGram Agreement"), with MoneyGram
Payment Systems, Inc. ("MPS"), an affiliate of Travelers Express. The Existing
MoneyGram Agreement expires by its terms on December 31, 2000.
In June 1996, upon the extension of the Existing MoneyGram Agreement to its
current expiration date, the Company received a bonus of $2 million. The Company
also receives incentive bonuses under the Existing MoneyGram Agreement for
opening or acquiring new MoneyGram service locations. All of the bonuses
received by the Company under the Existing MoneyGram Agreement have been
deferred and included in "Other liabilities" in the Company's consolidated
balance sheets and are amortized to revenues over the term of the Existing
MoneyGram Agreement. During the fiscal year ended June 30, 2000, $2.6 million of
this amortization was recorded and included in money transfer services revenues.
New Money Transfer Agreement. In June 2000, the Company signed a Money
Transfer Agreement with Travelers Express and MPS to become effective upon the
expiration of the Existing MoneyGram Agreement (the "New MoneyGram Agreement").
During the seven-year term of the New MoneyGram Agreement, the Company will
exclusively offer and sell MoneyGram wire transfer services. Under the New
MoneyGram Agreement (as under the Existing MoneyGram Agreement), the Company
will earn commissions for each transmission and receipt of money through the
MoneyGram network effected at a Company-owned location; those commissions will
equal varying percentages of the fees charged by MPS to consumers for the
MoneyGram services.
Under the New MoneyGram Agreement, the Company will also be entitled to
receive a total of approximately $12.5 million in incentive bonuses, payable in
equal monthly installments (without interest) over the seven-year term. The
amount of those monthly installments will be subject to reduction if the Company
closes or sells a significant number of those locations at which MoneyGram
services are offered at the beginning of the New MoneyGram Agreement. In
addition, the Company will be entitled to receive certain incentive payments
regarding new MoneyGram service locations that it opens or acquires during the
term of the New MoneyGram Agreement.
The Company's execution of the New MoneyGram Agreement extends and strengthens
the Company's relationship with Travelers Express and its affiliates. That
relationship includes the money order agreement as well as the MoneyLine
Agreement for bill-payment services, and is therefore significant to the
Company's business. Though the Company does not anticipate any disruption of
that relationship, if such a disruption were to occur, the Company's business
could be materially and adversely affected.
BANK LOANS
In August 1999 the Company entered into a Master Loan Agency Agreement (the
"Goleta Agreement") with Goleta National Bank, a national bank located in
Goleta, California ("Goleta"). Under the Goleta Agreement, the parties agreed to
develop and implement an arrangement under which short-term loans made by Goleta
would be offered at the Company's owned locations. Since entering into the
Goleta Agreement, the parties have developed software and various procedures to
offer the short-term loans contemplated by the Goleta Agreement ("Bank Loans");
and since March 2000, the parties have implemented those procedures and offered
Bank Loans at an increasing number of the Company's locations. As of August 31,
2000, Bank Loans were offered at 896 of the Company's owned locations.
The terms of the Bank Loans are established, and subject to change from time
to time, solely by Goleta. Currently, a Bank Loan may be up to $500 and must be
repaid in 14 days. A Bank Loan may be renewed by a borrower only if at least
five percent of the outstanding principal amount is paid. A borrower may have
only one Bank Loan outstanding at a time.
<PAGE>
Goleta determines, in accordance with its credit criteria, those applicants to
whom a Bank Loan will be made. The Company's involvement in the Bank Loan
process is limited to the electronic transmission of information and documents
in accordance with procedures established by Goleta. A Bank Loan is funded into
the borrower's account at Goleta. Access to those funds is through a debit card
and personal identification number issued by Goleta in the Bank Loan process.
That debit card (with identification number) may be used at various ATM machines
or retail stores or at the Company's locations.
A Bank Loan may be repaid at an ACE location, for transmission to Goleta and
credit to the borrower's bank account. Goleta has appointed the Company as
servicing agent for any necessary collection activity regarding past-due Bank
Loans, subject to Goleta's reasonable direction. Goleta has sole authority to
modify the terms, or extend the payment, of any Bank Loans.
Under the Goleta Agreement, the Company must purchase from Goleta a
participation interest in all Bank Loans made on a previous day or previous
days. That participation entitles the Company to substantially all of the
interest received by Goleta from the borrowers, and subjects the Company to
substantially all of the risk of nonpayment by the borrowers. The Company must
pay participation processing fees regarding the Bank Loans under the Goleta
Agreement.
The Company is responsible under the Goleta Agreement for up to substantially
all of any third-party claims regarding the Bank Loans other than claims
resulting solely from Goleta's misconduct.
The Company has agreed in the Goleta Agreement not to offer at its locations
any short-term loan that is substantially similar to the Bank Loans, except
where the Company is precluded from offering Bank Loans by contract, law, or
regulatory authority. The Company may offer its payday loan service or other
short-term loans where Bank Loans cannot be offered. Goleta agreed in the Goleta
Agreement not to offer or make Bank Loans or any substantially similar
short-term loan anywhere in the United States except at an office of Goleta or
as required by law. The parties' exclusivity obligations will be effective so
long as applications for a minimum number of Bank Loans are submitted to Goleta
from ACE locations during each 12-month period beginning April 14, 2000.
The term of the Goleta Agreement will expire on April 13, 2005, at the
earliest. That term will be extended annually if applications for a certain
number of Bank Loans are submitted to Goleta from ACE locations during each
12-month period beginning April 14, 2000.
Either party may terminate the Goleta Agreement because of (1) the other
party's insolvency, (2) the other party's failure to make any required payment
or to perform any other material obligation that is not cured after notice, or
(3) any action by a regulatory authority that requires Goleta to cease making
Bank Loans or imposes restrictions that would materially and adversely affect
Goleta's ability to make Bank Loans. In addition, the Company may terminate upon
its determination that any change by Goleta in the terms of the Bank Loans or
its credit criteria has adversely affected or would adversely affect the market
for Bank Loans.
Because the Company's economic interest in the Bank Loans results from the
purchase of participations, the Company is dependent on Goleta's originating the
Bank Loans. If any change in the terms of, or the credit criteria for, the Bank
Loans were to result in losses that the Company deems unacceptable, the
Company's sole legal recourse would be exercise its right to terminate the
Goleta Agreement.
The Goleta Agreement permits the Company to expand its offering of loan
services; the Company can offer Bank Loans at many more of its locations than it
could offer its "payday loan" service. If the Goleta Agreement were terminated
or the Company's ability to offer Bank Loans at a significant number of its
locations were otherwise restricted, then (even though the Company might again
be able to offer a payday loan service at many locations) the Company's
loan-related revenues could be materially and adversely affected.
INVESTMENT IN EPACIFIC
In March and April 2000, the Company invested a total of $1 million in
ePacific Incorporated ("ePacific"), a private company in the business of
providing customized debit-card payment systems and electronic funds transfer
processing services, which has been recorded under the cost method and is
included in other assets. ePacific, formerly a controlled subsidiary of Goleta,
provides the debit-card system and processing services to Goleta to enable it to
make the Bank Loans described above in "-- Bank Loans."
<PAGE>
The Company's investment in ePacific was made at the same times, and on the
same terms, as the investment by two venture capital investors. The Company
purchased approximately 14% of the shares of ePacific's Series A Convertible
Preferred Stock purchased by the group of investors. The terms of those shares
are typical of preferred stock issued and purchased in venture capital
investments, and include the right to periodic dividends from ePacific, the
right to a preferential distribution upon liquidation of ePacific, voting rights
with ePacific common stock, and the right to convert the preferred stock into
ePacific common stock. Under a stockholders' agreement with ePacific and its
other stockholders, the Company agreed to certain restrictions on transfer of
its ePacific stock, received certain securities registration rights regarding
resale of its ePacific stock, and received the right to designate one person to
serve as a director of ePacific. The Company designated Jay Shipowitz, its
President and Chief Operating Officer, to serve as a director of ePacific.
The investment in ePacific was motivated by the Company's belief that the
market for financial-services products delivered through debit-ATM cards will
continue to expand; a reason for that expansion is the technology that now
permits value to be placed or "loaded" on a debit-ATM card for a consumer in a
retail environment. The Company also believes that ePacific has developed unique
debit-card processing applications for internet users that may allow it to
compete effectively with some of the larger debit-card processors.
ARRANGEMENTS REGARDING SECURED NOTES
In December 1996, the Company consummated a private placement of $20 million
of its 9.03% Senior Secured Notes ("Notes") and issued the Notes to Principal
Life Insurance Company (formerly known as Principal Mutual Life Insurance
Company) ("Principal") under the terms of a Note Purchase Agreement dated as of
November 15, 1996 (the "Note Purchase Agreement"). The net proceeds of the
issuance of the Notes were used to pay in full the then outstanding $18.5
million principal amount of the Company's term-loan indebtedness (incurred for
acquisitions and capital expenditures), plus corresponding interest and fees,
and for general corporate purposes of the Company.
Interest on the unpaid principal amount of the Notes, accruing at 9.03% per
annum, is payable semiannually on May 15 and November 15 of each year,
commencing May 15, 1997. The principal amount of the Notes is payable in five
equal installments of $4 million on November 15 of each year, commencing
November 15, 1999. All principal and accrued interest is payable at the
scheduled maturity of the Notes on November 15, 2003.
The Company may prepay the Notes, at any time or from time to time, in the
principal amount of at least $1 million, plus accrued interest on the principal
amount being prepaid, plus an amount approximately equal to the discounted
present value of the return that the holders of the prepaid Notes would have
received if the prepayment were not made. Any prepayment will ratably reduce the
amount of each scheduled principal payment on the Notes due thereafter.
The Note Purchase Agreement contains certain restrictive covenants affecting
the business and affairs of the Company and its subsidiaries. Those covenants
address, among other things, the maintenance of specified financial ratios, the
incurrence and payment of other indebtedness, the disposition of assets or of
the ownership of any subsidiary of the Company, the grant or existence of other
liens on the assets of the Company and its subsidiaries, and transactions
between the Company or its subsidiaries and any of their affiliates.
The Note Purchase Agreement also specifies events of default that could result
in the acceleration of the maturity of the Notes. Those events include (a) any
failure by the Company to pay any amount due under the Notes, (b) any failure by
the Company to comply with various covenants set forth in the Note Purchase
Agreement and ancillary documents, (c) any misrepresentation or breach of
warranty by the Company, (d) any failure by the Company or any of its
subsidiaries to pay, or perform its obligations under, any indebtedness for
borrowed money or under capital leases in excess of $1 million, (e) various
events of bankruptcy or insolvency of the Company or any of its subsidiaries,
and (f) any final judgment of any court in excess of $1 million against the
Company or any of its subsidiaries remaining in effect 30 days after the entry
thereof.
<PAGE>
The Company's obligations under the Notes, the Note Purchase Agreement, and
all ancillary documents entered into with Principal are secured by liens on all
of the assets of the Company. Concurrent with the Note Purchase Agreement, the
Company entered into a Collateral Trust Agreement dated as of November 15, 1996
(the "Original Collateral Trust Agreement"), with Wilmington Trust Company, as
trustee (the "Collateral Trustee"), Principal, and the Company's other secured
lender at the time. The Original Collateral Trust Agreement created a collateral
trust to secure the Company's obligations to both of its then existing secured
lenders and, under conditions set forth therein, future secured lenders to the
Company. The Original Collateral Trust Agreement was amended and superseded in
connection with the Company's Credit Agreement described below under "- Credit
Facilities."
CREDIT FACILITIES
In July 1998, the Company entered into a Credit Agreement with a syndicate of
banks (the "Lenders") represented by Wells Fargo Bank (Texas), National
Association ("Wells Fargo Bank"), as lead agent and Chase Bank of Texas as
co-agent (the "Credit Agreement"). The Credit Agreement was renewed in December
1999, with Wells Fargo Bank as lead agent. The credit facilities under the
Credit Agreement consist of a revolving (line-of-credit) facility of $130
million (the "Revolving Facility") and a term-loan facility of $35 million (the
"Term-Loan Facility"). The Revolving Facility is used for working capital and
general corporate purposes of the Company, and the Term-Loan Facility is used
for store construction and relocation and other capital expenditures of the
Company, including acquisitions, and refinancing other debt. Also, upon certain
conditions, in addition to the Revolving Facility, the Company has available
from Wells Fargo Bank (a) an additional 25-day revolving advance facility of up
to $25 million and (b) a standby letter-of-credit facility of up to $1.5
million. The terms of the Credit Agreement and ancillary documents are described
in more detail at "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources - Credit
Facilities."
ITEM 2. PROPERTIES
All but two of the Company's stores are leased, generally under leases
providing for an initial term of three years and renewal terms of from three to
six years. The Company acquired, as part of the Check Express acquisition in
February 1996, and still owns the land and building at which one of the
Company's stores is located in Indianapolis, Indiana. Management believes that
the land and building are suitable for the successful operation of a
Company-owned store. The Company's headquarters offices in Irving, Texas, a
suburb of Dallas, occupy approximately 40,000 square feet under a 62-month
lease, the term of which expires in April 2001.
ITEM 3. LEGAL PROCEEDINGS
The Company has entered into an agreement to settle the lawsuit against the
Company in Arkansas, Angie Gwatney v. Ace Cash Express, Inc. Under the
settlement, qualified customers will receive certificates that may be redeemed
for prepaid telephone cards from the Company. The face amount of the telephone
cards will equal 75% of the total amount of fees ($2.2 million) that the
customers paid the Company in deferred-presentment transactions from February 9,
1996 through June 15, 1999. It is impossible to predict the number and face
amount of the telephone cards that the Company will have to provide to
customers. But, based on its estimate of the distribution of those cards, the
Company has provided in its fiscal 2000 financial statements a total of $640,000
to satisfy its settlement obligations. The settlement agreement has been
approved by the court, and the Company believes that the approval will be final
and effective on October 5, 2000.
On December 17, 1999, a lawsuit regarding the Company's "payday loan" service,
Eva J. Rowings v. Ace Cash Express, Inc., was filed against the Company in the
United States District Court for the Southern District of Indiana. The
plaintiff, for herself and others similarly situated since December 17, 1998,
alleges that the Company's disclosures to recipients of payday loans in Indiana
do not comply with the requirements of the Truth in Lending Act and Regulation Z
<PAGE>
under federal law and of the Uniform Consumer Credit Code in Indiana. On January
27, 2000, the plaintiff filed an amended complaint alleging that the Company
violated Indiana Code 35-45-7-2 (Indiana's "loansharking" statute) and that the
loans are therefore void. The plaintiff seeks monetary damages as specified by
statute as well as attorneys' fees and court costs from the Company. Because
this lawsuit purports to be a class action, the amount of damages for which the
Company may be responsible is necessarily uncertain. That amount would depend on
proof of the allegations, on the number of recipients of payday loans who
constitute the class of plaintiffs (if permitted by the court), and on proof of
actual damages sustained by the plaintiffs. Under each of the federal Truth in
Lending Act and the Indiana Uniform Consumer Credit Code, if the court were to
certify this lawsuit as a class action and if the Company were found to have
violated that statute, the Company's maximum liability would be the sum of (1)
any actual damages sustained by the plaintiffs as a result of the violation, (2)
the lesser of $500,000 or 1% of the Company's net worth, and (3) reasonable
attorneys' fees and court costs. Also, if the Company were found to have
violated Indiana Code 35-45-7-2 in connection with the payday loans to the class
of plaintiffs, those loans could be declared void. The Company has filed a
motion to dismiss all federal law claims asserted in the complaint and has asked
the court to decline to exercise jurisdiction over the remaining state law
claims if the federal law claims are dismissed. The court also is considering
whether to certify to the Indiana Supreme Court certain state law issues that
are common to this case and other "payday loan" cases that are pending in the
court against other payday lenders.
On January 20, 2000, the plaintiffs in the lawsuit filed against the Company
in the United States District Court for the Middle District of Florida, Gary M.
Kane and Wendy Betts v. Ace Cash Express, Inc., et al., voluntarily dismissed
their remaining federal Truth in Lending Act claims, and therefore that lawsuit,
without prejudice. On March 22, 2000, however, those plaintiffs and an
additional plaintiff filed a lawsuit, Wendy Betts, John Cardegna and Gary M.
Kane v. Ace Cash Express, Inc., et al., in a Florida state Circuit Court in
Orange County, Florida. This lawsuit was filed against the Company, its wholly
owned subsidiary Check Express, Inc., and persons who "own, organized,
developed, control, expanded, promoted, and profited from" alleged illegal
activities of the Company and Check Express, Inc. described in the complaint. In
this lawsuit the plaintiffs, for themselves and others similarly situated since
March 22, 1996, alleged that the Company's deferred-deposit activities in
Florida violated certain Florida lending practices and usury statutes, the
Florida Consumer Finance Act, the Florida Deceptive and Unfair Trade Practices
Act, and the Florida Civil Remedies for Criminal Practices Act and constituted
fraud. The plaintiffs sought an injunction against any such further alleged
illegal activities as well as actual and punitive damages of various kinds,
including forfeiture of the total amount of the deferred-deposit transactions
with the purported class of customers in Florida, an amount equal to twice the
fees and charges received by the Company from those transactions, an amount
equal to three times the damages suffered by the purported class, the
plaintiffs' attorneys' fees, and court costs. On September 1, 2000, however, the
state court dismissed the complaint, because of defects in the plaintiffs'
pleadings, without prejudice. The Company does not know whether the plaintiffs
will attempt to cure the defects in order to maintain this lawsuit.
On March 30, 2000, the Company was served with a lawsuit regarding the
Company's "payday loan" service in Louisiana, Shirley Porter and Joyce Davis v.
Ace Cash Express, Inc., filed in the United States District Court for the
Eastern District of Louisiana. This lawsuit was filed against the Company and
persons who "have owned, organized, developed, controlled and promoted and
profited from" alleged illegal activities of the Company described in the
complaint. The plaintiffs, for themselves and others similarly situated, allege
that the Company's lending and collection activities regarding payday loans in
Louisiana violated the Louisiana Small Loan Act, resulted in unconscionable (and
therefore unenforceable) contracts, involved the charging and collection of fees
that were excessive under the Louisiana Consumer Credit Law, involved charging
and collecting usurious interest under Louisiana law, and violated the federal
Racketeer Influenced and Corrupt Organizations (RICO) Act. The class that the
plaintiffs seek to represent would consist of customers of the Company's payday
loan service in Louisiana since February 25, 1999, regarding the Louisiana
state-law claims, and since February 25, 1996, regarding the RICO Act claim. The
plaintiffs seek an injunction against any such further alleged illegal
activities as well as damages of various kinds, including an amount equal to all
fees and charges received by the Company from the payday loans made to the
purported class of customers in Louisiana, an amount equal to three times the
damages suffered by the purported class, the plaintiffs' attorneys' fees, and
court costs. Based on an interpretive letter from the Louisiana Office of
Financial Institutions, on June 22, 2000, the Company filed a motion for
judgement on the pleadings, which remains pending before the court.
On December 6, 1999, a complaint was filed in a lawsuit against the Company,
Eugene R. Clement v. Ace Cash Express, Inc., in a Florida state Circuit Court in
Hillsborough County, Florida. The plaintiff, for himself and others similarly
situated, alleged that the Company's collection activities regarding unpaid
amounts under deferred-deposit transactions in Florida violated the Florida
Deceptive and Unfair Trade Practices Act. In that complaint, the plaintiff did
not seek damages, but sought only an injunction against the alleged illegal
activities, attorneys' fees, and court costs. On March 15, 2000, however, the
<PAGE>
plaintiff amended his complaint in this lawsuit to allege that the Company's
deferred-deposit activities violated the federal Truth in Lending Act and to
seek damages as provided by that Act. On March 27, 2000, this lawsuit was
removed by the Company to the United States District Court for the Middle
District of Florida.
On April 14, 2000, another complaint was filed in a lawsuit against the
Company, Neil Gillespie v. Ace Cash Express, Inc., in the United States District
Court for the Middle District of Florida. The plaintiff, for himself and others
similarly situated, alleges that the Company's deferred-deposit activities in
Florida violated the federal Truth in Lending Act, the Florida usury laws, and
the Florida Deceptive and Unfair Trade Practices Act. The plaintiff seeks an
injunction against any such further alleged illegal activities as well as actual
and punitive damages of various kinds, including damages under the federal Truth
in Lending Act, an amount equal to twice the fees and charges received by the
Company from its deferred-deposit transactions with the purported class of
customers in Florida, the plaintiffs' attorneys' fees, and court costs. By order
dated August 8, 2000, this lawsuit and the Clement lawsuit were consolidated by
the United States District Court for the Middle District of Florida. On August
15, 2000, the plaintiffs filed an amended consolidated complaint that restated
in a single complaint the previous claims asserted against the Company under the
federal Truth in Lending Act, the Florida usury laws, and the Florida Deceptive
and Unfair Trade Practices Act. On August 25, 2000, the Company filed a motion
to dismiss that complaint, which remains pending before the court.
On May 11, 2000, a complaint was filed in a lawsuit against the Company, Edna
Jordan v. Ace Cash Express, Inc., in an Alabama state Circuit Court in Morgan
County, Alabama. The plaintiff, for herself and others similarly situated,
alleges that the Company's activities violate the Alabama Small Loan Act and
other Alabama lending and usury laws. The plaintiff seeks an injunction against
any such further alleged illegal activities as well as unspecified compensatory
and punitive damages. Nevertheless, the plaintiff was not a customer of the
Company, but was a customer of one of the Company's franchisees (not named in
the lawsuit). Because the Company does not offer "payday loans" at its owned
locations in Alabama, the plaintiff is apparently alleging that the Company is
responsible for the franchisee's payday-lending activities in Alabama. The
Company has filed a motion for summary judgment denying any such responsibility,
and that motion remains pending before the court.
Because each of these pending lawsuits purports to be a class action, the
amount of damages for which the Company might be responsible is necessarily
uncertain. Regarding each lawsuit, that amount would depend upon proof of the
allegations, on the number of customers of the payday loan service who
constitute the class of plaintiffs (if permitted by the court), and on proof of
actual damages sustained by the plaintiffs. The Company believes that each of
these lawsuits is without merit. The Company denies all of the plaintiffs'
material allegations in these lawsuits and intends to vigorously defend these
lawsuits.
On May 19, 2000, the Company was served with an Economic Crimes Subpoena Duces
Tecum by the office of the Attorney General of the State of Florida. The
subpoena requested the Company to produce, for review by the Attorney General's
office, various documents and records relating primarily to the Company's payday
lending activities in Florida. On or about the same date, the Attorney General's
office also served substantially similar subpoenas on the three other largest
payday lenders in Florida. The Company has produced the documents and records
that the Attorney General's office has required to date. The Attorney General's
office has not notified the Company of or (to the Company's knowledge) publicly
announced the purpose or the scope of the investigation. The Attorney General's
office has not notified the Company of any allegation that the Company has
violated any Florida law, and the Company does not expect any such allegation to
result from the investigation.
The Company is also involved from time to time in various legal proceedings
incidental to the conduct of its business. Management believes that none of
these legal proceedings will result in any material impact on the Company's
financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders of the Company during
the fourth quarter of fiscal 2000.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is quoted on The Nasdaq Stock Market ("NASDAQ")
under the symbol "AACE". At September 14, 2000, there were approximately 107
holders of record of the Common Stock and there were approximately 1,500
beneficial holders of the Common Stock held in nominee or street name.
The following table sets forth the high and low sale prices of the Common
Stock as reported by NASDAQ for the past two fiscal years:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
Fiscal 1999
-----------
<S> <C> <C>
Quarter ended September 30, 1998 20-1/2 11-3/4
Quarter ended December 31, 1998 16-1/2 11-1/4
Quarter ended March 31, 1999 15 12-1/8
Quarter ended June 30, 1999 15-1/16 12-3/4
Fiscal 2000
-----------
Quarter ended September 30, 1999 14-7/8 14-1/2
Quarter ended December 31, 1999 19 18-1/4
Quarter ended March 31, 2000 17-3/4 17-1/8
Quarter ended June 30, 2000 12-5/32 11-7/8
</TABLE>
On September 14, 2000, the last reported sale price of the Common Stock on
NASDAQ was $11.125 per share.
The Company has never paid dividends on the Common Stock and has no plans to
pay dividends in the foreseeable future. In addition, the Company's ability to
pay cash dividends is currently limited under the Credit Agreement (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Credit Facilities").
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED JUNE 30,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(in thousands, except per share and store data)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues $140,636 $122,314 $100,194 $87,392 $68,959
Store expenses 94,668 80,943 67,103 59,376 48,552
Region expenses 11,119 9,369 8,353 7,477 5,647
Headquarters expenses 8,247 7,673 7,198 6,106 4,744
Franchise expenses 1,063 1,288 965 1,046 458
Other depreciation and amortization 3,798 4,236 3,502 3,024 2,152
Interest expense, net 6,123 4,476 2,437 2,271 1,714
Other expenses 955 689 49 213 236
---------- ----------- ----------- ----------- -----------
Income before income taxes 14,663 13,640 10,587 7,879 5,456
Income taxes 5,797 5,390 4,185 3,113 2,130
---------- ----------- ----------- ----------- -----------
Net income before cumulative effect of
accounting change (1) $ 8,866 $ 8,250 $ 6,402 $ 4,766 $ 3,326
========== =========== =========== =========== ===========
Diluted earnings per share before cumulative effect
of accounting change (1) $ .86 $ .80 $ .63 $ .48 $ .35
========== =========== =========== =========== ===========
Weighted average number of shares (2) 10,361 10,283 10,215 9,845 9,570
------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Cash and cash equivalents $105,577 $59,414 $60,168 $55,494 $56,603
Total assets 221,423 145,233 134,635 124,350 114,684
Term advances 18,500 10,500 7,073 8,209 16,969
Money order principal payable 10,487 5,340 47,486 41,281 35,487
Revolving advances 95,000 40,100 1,932 7,166 21,157
Senior secured notes payable 16,180 20,226 20,226 20,231 -
Shareholders' equity 55,159 48,274 38,951 31,056 25,236
------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL STATISTICAL DATA:
Company-owned stores in operation:
Beginning of year 798 683 617 544 452
Acquired 36 35 15 46 69
Opened 99 99 62 45 33
Closed (18) (19) (11) (18) (10)
---------- ----------- ----------- ----------- -----------
End of year 915 798 683 617 544
========== =========== =========== =========== ===========
Percentage increase in comparable store revenues
from prior year:
Exclusive of tax-related revenues (3) 7.1% 10.6% 8.0% 5.5% 4.1%
Total revenues (4) 6.9% 10.8% 6.9% 6.3% 4.7%
Capital expenditures (in thousands) $12,255 $10,089 $5,742 $4,868 $3,435
Cost of net assets acquired (in thousands) $11,359 $8,378 $4,708 $10,766 $14,432
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Before a cumulative effect of accounting change recorded in the three
months ended September 30, 1999, of $0.6 million, net of a $0.4 million tax
benefit, relating to the adoption of Statement of Position 98-5, "Reporting
on the Costs of Start-up Activities."
(2) Includes common shares and dilutive shares.
(3) Change in revenues computed excluding electronic tax filing and tax refund
check cashing for the years compared.
(4) Calculated based on the changes in revenues of all stores open for the full
years compared.
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA (CONTINUED)
YEAR ENDED JUNE 30,
-------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- ------- -------
OPERATING DATA (CHECK CASHING AND
MONEY ORDERS):
<S> <C> <C> <C> <C> <C>
Face amount of checks cashed
(in millions) $ 3,839 $ 3,373 $ 2,898 $ 2,621 $ 2,144
Face amount of money orders sold
(in millions) $ 1,585 $ 1,905 $ 1,858 $ 1,812 $ 1,531
Face amount of money orders sold as a
percentage of the face amount of checks
cashed 41.3% 56.5% 64.1% 69.1% 71.4%
Face amount of average check $ 339 $ 320 $ 305 $ 291 $ 285
Average fee per check $ 7.92 $ 7.47 $ 7.26 $ 6.97 $ 6.81
Fees as a percentage of average check 2.33% 2.33% 2.38% 2.40% 2.39%
Number of checks cashed (in thousands) 11,317 10,556 9,496 9,020 7,535
Number of money orders sold
(in thousands) 12,339 14,495 14,146 13,608 11,835
COLLECTIONS DATA:
Face amount of returned checks (in
thousands) $ 16,548 $ 12,442 $ 10,193 $ 10,399 $ 8,661
Collections (in thousands) 10,788 7,423 6,301 6,554 5,004
-------- ------- --------- -------- --------
Net write-offs (in thousands) $ 5,760 $ 5,019 $ 3,892 $ 3,845 $ 3,657
======== ======= ========= ======== ========
Collections as a percentage of
returned checks 65.2% 59.7% 61.8% 63.0% 57.8%
Net write-offs as a percentage of
revenues 4.1% 4.1% 3.9% 4.4% 5.3%
Net write-offs as a percentage of
the face amount of checks cashed .15% .15% .13% .15% .17%
-------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA (SMALL CONSUMER LOANS):
Volume (in thousands) $137,015 $105,765 $ 69,182 $ 39,336 -
Average advance $ 240 $ 200 $ 177 $ 147 -
Average finance charge $ 34.51 $ 30.30 $ 27.51 $ 25.03 -
Number of loans made (in thousands) 557 460 338 229 -
COLLECTIONS DATA:
Net charge-offs (in thousands) $ 4,177 $ 2,786 $ 1,807 $ 1,183 -
Net charge-offs as a percentage of
small consumer loan revenue 23.4% 20.0% 19.5% 20.7% -
Net charge-offs as a percentage of
small consumer loan volume 3.1% 2.6% 2.6% 3.0% -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE ANALYSIS
----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
---------------------------------------------------------------------------------------
(in thousands) (percentage of revenue)
2000 1999 1998 2000 1999 1998
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Check cashing fees $ 77,574 $ 68,249 $ 60,416 55.2% 55.8% 60.3%
Loan fees and interest 17,872 14,257 10,137 12.7 11.7 10.1
Tax check fees 12,067 10,590 8,571 8.6 8.7 8.5
Bill-payment services 9,447 8,394 4,146 6.7 6.8 4.1
Money transfer services 8,944 7,951 6,082 6.4 6.5 6.1
Money order fees 7,032 5,332 2,879 5.0 4.4 2.9
New customer fees 2,164 2,296 2,207 1.5 1.9 2.2
Franchise revenues 2,537 2,117 1,665 1.8 1.7 1.7
Other fees 2,999 3,128 4,091 2.1 2.5 4.1
------------ ------------ ------------ ------------ ------------ ------------
Total revenue $140,636 $122,314 $100,194 100.0% 100.0% 100.0%
============ ============ ============ ============ ============ ============
Average revenue per store
(excluding franchise revenues) $ 161.1 $ 162.3 $ 151.6
</TABLE>
FISCAL 2000 COMPARED TO FISCAL 1999. Revenues increased $18.3 million, or 15%,
from $122.3 million in the year ended June 30, 1999, to $140.6 million in the
year ended June 30, 2000. This revenue growth resulted from a $7.5 million, or
6.9%, increase in comparable Company-owned store revenues (651 stores) and a
$10.8 million increase from stores which were opened or acquired after June 30,
1998, and were therefore not open for both of the full periods compared. Average
revenue per store declined by $1,200 because of the significant number of stores
open for two years or less; revenues from new stores must typically be built up
over the first few years of operation. The number of Company-owned stores
increased by 117, or 15%, from 798 stores open at June 30, 1999, to 915 stores
open at June 30, 2000. The increase in total check cashing fees accounted for
59% of the total revenue increase; the increase in loan fees and interest
accounted for 20% of the total revenue increase; and the increase in money order
fees accounted for 9% of the total revenue increase.
Check cashing fees, including tax check fees, increased $10.8 million, or 14%,
from $78.8 million in fiscal 1999 to $89.6 million in fiscal 2000. This increase
resulted from a 7% increase in the total number of checks cashed and a 6%
increase in the average fee per check due to the increase in the average size
check. Loan fees and interest increased $3.6 million, or 25%, to $17.9 million
in fiscal 2000 as compared to $14.3 million in fiscal 1999. This increase
resulted from the introduction of the Goleta National Bank loan product in the
last few months of fiscal 2000 and the expansion of the loan business to 19 more
states than in fiscal 1999. Money order fees increased $1.7 million, or 32%, as
a result of increased money order pricing, enabled by the Company's Credit
Agreement and the money order agreement with Travelers Express (which were
effective for only approximately half of fiscal 1999). Bill-payment services
increased $1.0 million, or 13%, principally as a result of new bill-payment
contracts and growth in payment revenue from existing bill-payment contracts.
Money transfer services revenues increased $1.0 million, or 13%, principally as
a result of acquired stores and related revenue guarantees and bonuses.
During fiscal 2000, the Company sold six franchised stores, opened 56 franchised
stores, acquired seven former franchised stores and closed six franchise stores.
Franchise revenues consist of royalties, initial franchise fees, and buyback
fees. Franchise revenues increased $0.4 million, or 20%, from fiscal 1999 to
fiscal 2000, due to the increase in the number of franchised stores.
<PAGE>
FISCAL 1999 COMPARED TO FISCAL 1998. Revenues increased $22.1 million, or 22%,
from $100.2 million in the year ended June 30, 1998, to $122.3 million in the
year ended June 30, 1999. This revenue growth resulted from a $9.8 million, or
10.8%, increase in comparable Company-owned store revenues (589 stores) and a
$12.3 million increase from stores which were opened or acquired after June 30,
1997, and were therefore not open for both of the full periods compared. The
number of Company-owned stores increased by 115, or 17%, from 683 stores open at
June 30, 1998, to 798 stores open at June 30, 1999. The increase in total check
cashing fees accounted for 45% of the total revenue increase; the increase in
loan fees and interest accounted for 19% of the total revenue increase; and the
increase in bill-payment services accounted for 19% of the total revenue
increase.
Check cashing fees, including tax check fees, increased $9.9 million, or 14%,
from $69.0 million in fiscal 1998 to $78.8 million in fiscal 1999. This increase
resulted from an 11% increase in the total number of checks cashed and a 3%
increase in the average fee per check due to the increase in the average size
check. Loan fees and interest increased $4.1 million, or 41%, to $14.3 million
in fiscal 1999 as compared to $10.1 million in fiscal 1998. This increase
resulted from an increase in the number of stores offering the Company's loan
products and an increase in the loan volume at stores previously offering those
products. Bill-payment services increased $4.2 million, or 102%, principally as
a result of new bill-payment contracts and growth in payment revenue from
existing bill-payment contracts. Money transfer services revenues increased $1.9
million, or 31%, principally as a result of acquired stores and related revenue
guarantees and bonuses. Money order fees increased $2.5 million, or 85%, as a
result of increased money order pricing, enabled by the Company's new Credit
Agreement and the new money order agreement with Travelers Express (which were
effective for approximately half of fiscal 1999).
During fiscal 1999, the Company sold 10 franchised stores, opened 42 franchised
stores, and acquired four former franchised stores. Franchise revenues consist
of royalties, initial franchise fees, and buyback fees. Franchise revenues
increased $0.5 million, or 27%, from fiscal 1998 to fiscal 1999, due to the
increase in the number of franchised stores.
Other fees decreased $1.0 million, or 24%, as a result of decreases in food
stamp distribution revenue and other miscellaneous product revenue.
<TABLE>
<CAPTION>
STORE EXPENSE ANALYSIS YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------------------------------------------------------
(in thousands) (percentage of revenue)
2000 1999 1998 2000 1999 1998
------------ ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Salaries and benefits $38,639 $32,435 $27,975 27.4 % 26.5 % 27.9 %
Occupancy 21,507 18,381 15,204 15.3 15.0 15.2
Armored and security 5,608 5,144 4,200 4.0 4.2 4.2
Returns and cash shorts 9,037 8,870 6,057 6.4 7.3 6.0
Loan losses 4,177 2,786 1,807 3.0 2.3 1.8
Depreciation 5,429 4,728 4,083 3.9 3.9 4.1
Other 10,271 8,599 7,777 7.3 7.0 7.8
------------ ------------ ------------ ----------- ----------- -----------
Total store expense $94,668 $80,943 $67,103 67.3 % 66.2 % 67.0 %
============ ============ ============ =========== =========== ===========
Average per store expense $ 110.5 $ 109.3 $ 103.2
</TABLE>
FISCAL 2000 COMPARED TO FISCAL 1999. Store expenses increased $13.7 million, or
17%, in fiscal 2000 over fiscal 1999, primarily as a result of the increased
number of stores open during the period. Average store expense increased by
approximately $1,200 per store in fiscal 2000 as compared to fiscal 1999. Store
expenses increased as a percentage of revenues from 66.2% in fiscal 1999 to
67.3% in fiscal 2000, principally as a result of a slight decrease in average
revenue per store. Salaries and benefits expenses, occupancy costs, and armored
and security expenses combined increased $9.8 million, or 18%, primarily as a
result of the increased number of stores in operation. Returned checks, net of
collections, and cash shortages increased $0.2 million, or 2%, in fiscal 2000 as
compared to fiscal 1999, due also to the increased number of stores in
operation. Returned checks, net of collections, and cash shortages decreased as
a percentage of revenues from 7.3% in fiscal 1999 to 6.4% in fiscal 2000. Loan
losses increased $1.4 million in fiscal 2000 over fiscal 1999, due primarily to
the increased loan volume resulting from the broader availability of the Goleta
National Bank loan product. Loan losses increased as a percentage of loan fees
and interest revenue from 20% in fiscal 1999 to 23% in fiscal 2000. Depreciation
expense increased $0.7 million, or 15%, due to the increased number of stores in
operation during fiscal 2000 as compared to fiscal 1999. Other store expenses
increased $1.7 million, or 19%, as a result of the increased number of stores in
operation and the expensing of new store start-up costs which were previously
capitalized.
<PAGE>
FISCAL 1999 COMPARED TO FISCAL 1998. Store expenses increased $13.8 million, or
21%, in fiscal 1999 over fiscal 1998, primarily as a result of the increased
number of stores open during the period. Average store expense increased by
approximately $6,000 per store in fiscal 1999 as compared to fiscal 1998. Store
expenses decreased as a percentage of revenues from 67.0% in fiscal 1998 to
66.2% in fiscal 1999, principally as a result of the increase in average
revenues per store. Salaries and benefits expenses, occupancy costs, and armored
and security expenses combined increased $8.6 million, or 18%, primarily as a
result of the increased number of stores in operation. Returned checks, net of
collections, and cash shortages increased $2.8 million, or 46%, in fiscal 1999
as compared to fiscal 1998, due to the increased number of stores in operation
during fiscal 1999 as compared to fiscal 1998. Returned checks, net of
collections, and cash shortages increased as a percentage of revenues from 6.0%
in fiscal 1998 to 7.3% in fiscal 1999. Loan losses increased $1.0 million in
fiscal 1999 over fiscal 1998, due primarily to the increased loan volume. Loan
losses increased as a percentage of loan fees and interest revenue from 18% in
fiscal 1998 to 20% in fiscal 1999. Depreciation expense increased $0.6 million,
or 16%, due to the increased number of stores in operation during fiscal 1999 as
compared to fiscal 1998. Other store expenses increased $0.8 million, or 11%,
but decreased as a percentage of revenue from 7.8% for fiscal 1998 compared to
7.0% of fiscal 1999.
<TABLE>
<CAPTION>
OTHER EXPENSE ANALYSIS YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------------------------------------------------------
(in thousands) (percentage of revenue)
2000 1999 1998 2000 1999 1998
----------- ------------ ------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Region expenses $ 11,119 $ 9,369 $ 8,353 7.9% 7.7% 8.3%
Headquarters expenses 8,247 7,673 7,198 5.9 6.3 7.2
Franchise expenses 1,063 1,288 965 0.8 1.1 1.0
Other depreciation and amortization 3,798 4,236 3,502 2.7 3.5 3.5
Interest expense, net 6,123 4,476 2,437 4.4 3.7 2.4
Other expenses 955 689 49 0.7 0.1 0.0
</TABLE>
REGION EXPENSES
FISCAL 2000 COMPARED TO FISCAL 1999. Region expenses increased $1.8 million, or
19%, in fiscal 2000 over fiscal 1999. The increase is primarily due to increased
field salaries and benefits, advertising and marketing materials for the new
loan product, and additional personnel for collections related to the new loan
product. Region expenses as a percentage of revenues increased slightly from
7.7% for fiscal 1999 to 7.9% for fiscal 2000.
FISCAL 1999 COMPARED TO FISCAL 1998. Region expenses increased $1.0 million, or
12%, in fiscal 1999 over fiscal 1998. The increase is primarily due to increased
salaries and benefits and travel expenses and the opening of a new region office
during the third quarter of fiscal 1999. Region expenses as a percentage of
revenues decreased from 8.3% for fiscal 1998 to 7.7% for fiscal 1999.
HEADQUARTERS EXPENSES
FISCAL 2000 COMPARED TO FISCAL 1999. Headquarters expenses increased $0.6
million, or 8%, in fiscal 2000 over fiscal 1999. The increase is the result of
additional salaries and benefits expenses, primarily related to merit increases
and additional personnel. Headquarters expenses as a percentage of revenue
decreased from 6.3% in fiscal 1999 to 5.9% in fiscal 2000.
FISCAL 1999 COMPARED TO FISCAL 1998. Headquarters expenses increased $0.5
million, or 7%, in fiscal 1999 over fiscal 1998. The increase is the result of
additional salaries and benefits expenses, primarily related to merit increases.
Headquarters expenses as a percentage of revenue decreased from 7.2% in fiscal
1998 to 6.3% in fiscal 1999.
<PAGE>
FRANCHISE EXPENSES
FISCAL 2000 COMPARED TO FISCAL 1999. Franchise expenses relate to the salaries,
benefits, and other franchisee support costs for the sales and support personnel
in the ACE Franchise Group. Franchise expenses decreased $0.2 million from
fiscal 1999 to fiscal 2000, primarily due to a reduction in legal expenses
during fiscal 2000 related to the Company's franchise program. Franchise expense
as a percentage of revenue decreased to 0.8% for fiscal 2000 from 1.1% for
fiscal 1999.
FISCAL 1999 COMPARED TO FISCAL 1998. Franchise expenses relate to the salaries,
benefits, and other franchisee support costs for the sales and support personnel
in the ACE Franchise Group. Franchise expenses increased $0.3 million from
fiscal 1998 to fiscal 1999, primarily due to increased legal expenses during
fiscal 1999 related to the Company's franchise program. Franchise expense as a
percentage of revenue increased to 1.1% for fiscal 1999 from 1.0% for fiscal
1998.
OTHER DEPRECIATION AND AMORTIZATION
FISCAL 2000 COMPARED TO FISCAL 1999. Other depreciation and amortization
decreased $0.4 million, or 10%, for fiscal 2000 as compared to fiscal 1999. This
decrease was attributable to the change in accounting principle adopted in the
first quarter of fiscal 2000 requiring start-up costs to be fully expensed
instead of capitalized, partially offset by amortization of intangibles
(goodwill and non-competition agreements) resulting from the 36 stores acquired
during fiscal 2000 and the 16 stores acquired during the last half of fiscal
1999, along with the depreciation expense resulting from the 99 stores opened in
fiscal 2000 and the 52 stores opened in the last half of fiscal 1999.
FISCAL 1999 COMPARED TO FISCAL 1998. Other depreciation and amortization
increased $0.7 million, or 21%, for fiscal 1999 as compared to fiscal 1998. This
increase was attributable to amortization of intangibles (goodwill and
non-competition agreements) resulting from the 35 stores acquired during fiscal
1999 and the eight stores acquired during the last half of fiscal 1998. The
increase was also attributable to depreciation expense resulting from the 99
stores opened in fiscal 1999 and the 35 stores opened in the last half of fiscal
1998.
INTEREST EXPENSE
FISCAL 2000 COMPARED TO FISCAL 1999. Interest expense, net of interest income,
increased $1.6 million, or 37%, in fiscal 2000 as compared to fiscal 1999. This
increase was principally the result of increased borrowings to finance store
openings and acquisitions.
FISCAL 1999 COMPARED TO FISCAL 1998. Interest expense, net of interest income,
increased $2.0 million, or 84%, in fiscal 1999 as compared to fiscal 1998. This
increase was principally the result of an increase in borrowings used to finance
store acquisitions and borrowings required to replace the deferred money order
remittances used by the Company under its previous money order agreement, which
was replaced in mid-December 1998.
INCOME TAXES
FISCAL 2000 COMPARED TO FISCAL 1999. A total of $5.8 million was provided for
income taxes for fiscal 2000 as compared to $5.4 million in fiscal 1999. The
provisions for income taxes were calculated based on the statutory federal
income tax rate of 34%, plus a provision for state income taxes and
non-deductible goodwill resulting from acquisitions. The effective income tax
rate was 39.5% for fiscal years 2000 and 1999.
FISCAL 1999 COMPARED TO FISCAL 1998. A total of $5.4 million was provided for
income taxes for fiscal 1999 as compared to $4.2 million in fiscal 1998. The
provisions for income taxes were calculated based on the statutory federal
income tax rate of 34%, plus a provision for state income taxes and
non-deductible goodwill resulting from acquisitions. The effective income tax
rate was 39.5% for fiscal years 1999 and 1998.
<PAGE>
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Effective July 1, 1999, the Company adopted the new accounting standard, AICPA
Statement of Position 98-5, Reporting on the Costs of Start-up Activities,"
resulting in a cumulative effect on net income of $0.6 million net of an income
tax benefit of $0.4 million.
BALANCE SHEET VARIATIONS
Cash and cash equivalents, the money order principal payable, and the revolving
advances vary because of seasonal and day-to-day requirements resulting
primarily from maintaining cash for cashing checks and making small consumer
loans, receipts of cash from the sale of money orders, loan volume, and
remittances on money orders sold. For the fiscal year ended June 30, 2000, cash
and cash equivalents increased $46.2 million, compared to a decrease of $0.8
million for the year ended June 30, 1999 primarily due to higher borrowings from
the revolving line of credit. This was a result of the higher cash requirements
due to the year-end business day being Friday in fiscal year 2000 compared to
Wednesday for fiscal year 1999.
Accounts receivable increased $1.8 million primarily due to higher receivables
from MoneyGram for commissions and bonuses related to the increased number of
Company-owned stores.
Loans receivable increased $13.2 million as a result of the offering of the
Goleta National Bank loan product at many more Company-owned stores, as compared
to the Company "payday loan" product or service.
Other current assets remained relatively unchanged from June 30, 1999 to June
30, 2000.
Property and equipment, net increased $6.5 million, and the excess of purchase
price over the fair value of net assets acquired, net increased $9.3 million,
during the fiscal year ended June 30, 2000, as a result of the 99 stores opened
and the 36 stores acquired during fiscal 2000, offset by related depreciation
and amortization.
The Company paid the first annual $4.0 million installment of principal of its
senior secured notes in November 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operating Activities
During fiscal 2000, 1999, and 1998, the Company had net cash provided by
operating activities of $6.7 million, $17.1 million, and $14.2 million,
respectively. The decrease from fiscal 1999 of $10.4 million is due primarily to
the cash required to support the Goleta Loan product.
During fiscal 2000, 1999, and 1998, the Company recognized $3.5 million, $2.2
million, and $1.5 million in deferred revenue, respectively. The Existing
MoneyGram Agreement provides incentive bonuses for opening new locations at
which MoneyGram services are offered as well as certain other performance
incentives. The bonus of $2 million received in June 1996 and additional
incentive bonuses are recognized as revenue over the term of the Existing
MoneyGram Agreement. Additionally, in fiscal 1999 the Company began recognizing
deferred revenue related to incentives received from Travelers Express. (See
"Business - Relationships with the Money Order and MoneyGram Suppliers.")
Cash Flows from Investing Activities
During fiscal 2000, 1999, and 1998, the Company used $12.3 million, $10.1
million, and $5.7 million, respectively, for purchases of property and equipment
related principally to new store openings and remodeling existing stores.
Capital expenditures related to acquisitions, including related liabilities
incurred, amounted to $11.4 million, $8.4 million, and $4.7 million for the
fiscal years ended June 30, 2000, 1999, and 1998, respectively.
<PAGE>
The Company's total budgeted capital expenditures, excluding acquisitions, are
currently anticipated to be approximately $8.6 million during its fiscal year
ending June 30, 2001, in connection with the opening of 50 new stores, the
relocation or remodeling of certain existing stores, and computer system
upgrades. The actual amount of capital expenditures will depend in part on the
number of new stores opened, the number of stores acquired, and the number of
existing stores that are relocated or remodeled. The Company believes that its
existing resources, anticipated cash flows from operations, and credit
facilities will be sufficient to finance its planned expansion and operations
during fiscal 2001. Although management anticipates that the Company will
continue to expand, there can be no assurance that the Company's expansion plans
will not be adversely affected by competition, market conditions, or changes in
laws or government regulations affecting check cashing and related businesses of
the types conducted by the Company.
During fiscal 2000, the Company invested $1.0 million in ePacific Incorporated,
a private company in the business of providing customized debit-card payment
systems and electronic funds transfer processing services. See "Business -
Investment in ePacific."
Cash Flows from Financing Activities
During fiscal 2000, 1999, and 1998, the Company had net cash provided by
financing activities of $64.1 million, $0.6 million, and $0.9 million,
respectively. During the year ended June 30, 2000, the Company borrowed, net
$54.9 million of revolving line-of credit, borrowed $8.0 million of term
advances, borrowed, net $5.1 million from the money order supplier, repaid $4.0
million of long-term notes payable, purchased $2.4 million of treasury stock,
and received $1.0 million from the exercise of stock options.
Money Order Agreement
In April 1998, the Company signed a money order agreement with Travelers
Express, which became effective December 17, 1998. In conjunction with this
agreement and the MoneyLine Agreement, the Company received $3 million from
Travelers Express in April 1998, received $400,000 in each of April 1999 and
April 2000, and is entitled to receive an additional $400,000 per year for the
next three years. The $3 million payment was deferred and included in other
liabilities in the consolidated balance sheets. The total $5 million from
Travelers Express is being amortized on a straight-line basis over the five-year
term of the agreements beginning January 1999.
Credit Facilities
In July 1998, the Company entered into the Credit Agreement with the Lenders (a
syndicate of banks) represented by Wells Fargo Bank and that Credit Agreement
was renewed in December 1999. The credit facilities available to the Company
under the Credit Agreement are the Revolving Facility of $130 million and the
Term-Loan Facility of $35 million. Also, upon certain conditions, in addition to
the Revolving Facility, the Company has available from Wells Fargo Bank (a) an
additional 25-day revolving advance facility of up to $25 million and (b) a
stand-by letter-of-credit facility of up to $1.5 million. The Revolving Facility
replaced the deferred money order remittances and revolving-advance facility
formerly used by the Company under the previous money order agreement, and the
Term-Loan Facility replaced the term advance facility under the previous money
order agreement. Borrowings under the Revolving Facility may be used for working
capital and general corporate purposes, and borrowings under the Term-Loan
Facility may be used for store construction and relocation and other capital
expenditures, including acquisitions, and refinancing other debt. The Company
first borrowed under the Credit Agreement on December 16, 1998, and discharged
all of the Company's obligations to the previous money order supplier under the
previous money order agreement. The Company has borrowed $95.0 million under the
Revolving Facility and $18.5 million under the Term-Loan Facility as of June 30,
2000.
The Revolving Facility is available to the Company until December 13, 2000, and
unless renewed, all unpaid principal and accrued interest under the Revolving
Facility will then be due. The Term-Loan Facility will be available to the
Company until December 13, 2000, unless renewed, and all amounts outstanding
under the Term-Loan Facility at that date will be payable over the succeeding
four years; principal will be payable quarterly based on a four-year
straight-line amortization. The Company's borrowings under the Revolving
Facility bear interest at a variable annual rate equal to, at the Company's
discretion, either the prime rate publicly announced by Wells Fargo Bank or the
London InterBank Offered Rate (LIBOR) plus 0.75%. The Company's borrowings under
<PAGE>
the Term-Loan Facility bear interest at a variable annual rate equal to, at the
Company's discretion, either the prime rate publicly announced by Wells Fargo
Bank plus 0.25% or LIBOR plus 1.75%. Interest is generally payable monthly,
except on LIBOR-rate borrowings; interest on LIBOR-rate borrowings will be
payable every 30, 60, or 90 days, depending on the period selected by the
Company. Under the Credit Agreement, the Company must also pay a commitment fee
equal to 0.2% of the unused portion of the Revolving Facility and 0.45% of the
unused portion of the Term-Loan Facility. The Credit Agreement also provides for
the Company's prepayment to the Lenders of certain amounts due under the
Term-Loan Facility upon certain events, including (i) the sale of assets from
which the Company has received net proceeds of at least $5 million during a
fiscal year, (ii) the Company's issuance of equity securities, and (iii) the
Company's having excess cash flow, as defined in the Credit Agreement, for a
fiscal year.
The short-term availability of the credit facilities under the Credit Agreement
permitted the Company to obtain a lower interest rate and other terms more
favorable than longer-term facilities, and the Company expects those facilities
to be renewed at the expiration of their currently effective period. There can
be no assurance, however, that the anticipated renewal will be effected. If such
renewal is not effected, the Company will have to obtain financing from other
sources, and that financing might be on terms less favorable to the Company than
those set forth in the Credit Agreement. The Company believes that other sources
of financing would be available to it if necessary; however, if the Company were
unable to obtain financing from one or more other sources, the Company's
liquidity and operations would be materially and adversely affected.
The Credit Agreement may be terminated before the stated expiration or maturity
dates of the Revolving Facility and the Term-Loan Facility - requiring all
unpaid principal and accrued interest to be paid to the Lenders - upon any Event
of Default as defined in the Credit Agreement. The Events of Default include:
(a) nonpayment of amounts due to the Lenders under the Credit Agreement, (b)
failure to observe or perform covenants set forth in the Credit Agreement that
are not cured, (c) a change in control of the Company, and (d) an event or
circumstance that has a material adverse effect on the Company's business,
operations, financial condition, or prospects.
The Company is subject to various restrictive covenants stated in the Credit
Agreement. These covenants, which are typical of those found in loan agreements
of that kind, include restrictions on the incurrence of indebtedness from other
sources, restrictions on advances to or investments in other persons or
entities, restrictions on significant acquisitions, restrictions on the payment
of dividends to shareholders or the repurchase of shares, and the requirement
that various financial ratios be maintained. The Company has received the
consent of the Lenders to implement the stock repurchase program described below
under "- Stock Repurchase Program."
The Company's payment and performance of its obligations under the Credit
Agreement and ancillary documents are secured by liens on all its assets. The
collateral arrangements are subject to the Amended and Restated Collateral Trust
Agreement dated as of July 31, 1998 (the "Amended Collateral Trust Agreement")
that was signed with the Credit Agreement. The Amended Collateral Trust
Agreement amended and superseded the Original Collateral Trust Agreement. See
"Business - Arrangement Regarding Secured Notes." The Amended Collateral Trust
Agreement created a collateral trust, with Wilmington Trust Company as trustee,
to secure the Company's obligations under the Credit Agreement and to the
Company's two other secured lenders, Principal and Travelers Express. The
Amended Collateral Trust Agreement includes agreements regarding the priority of
distributions to the secured lenders upon foreclosure and liquidation of the
collateral subject thereto and certain other intercreditor arrangements.
To reduce its risk of greater interest expense upon a rise in the prime rate or
LIBOR, the Company has entered into three interest-rate swap agreements with
Bank of America. Those agreements effectively converted a portion of the
Company's floating-rate interest obligations to fixed-rate interest obligations.
With respect to the revolving line-of-credit facility, the first notional amount
is $33 million for a two-year period that began January 4, 1999, and the second
notional amount is $10 million for a sixteen-month period that began September
3, 1999. The third notional amount under the term-loan facility is currently
$9.0 million, with decreases in calendar year 2000. The notional amounts were
determined based on the Company's minimum projected borrowings during calendar
years 1999 and 2000. The fixed rate applicable to the notional amount of $33
million under the revolving line-of-credit facility was 5.14% for calendar year
1999 and is 5.23% for calendar year 2000. The fixed rate applicable to the
notional amount of $10 million under the revolving line-of-credit facility is
6.00% for calendar year 1999 and for calendar year 2000. The fixed rate
applicable to the notional amount of $9.0 million under the term-loan facility
was 6.23% for calendar year 1999 and is 6.38% for calendar year 2000.
<PAGE>
Stock Repurchase Program
In August 1999, the Company's Board of Directors authorized the repurchase from
time to time of up to approximately $4 million of the Company's Common Stock in
the open market or in negotiated transactions. In August 2000, the Company's
Board of Directors authorized the repurchase of an additional $1 million of the
Company's Common Stock. This stock repurchase program will remain in effect
unless discontinued by the Board of Directors. As of June 30, 2000, the Company
had repurchased 181,400 shares at an average price of $13.25 per share.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," for its
fiscal year ending June 30, 1999. This standard requires the Company to report
financial and descriptive information about its reportable operating segments.
The Company considers its franchise operations to be a reportable operating
segment and has included appropriate disclosures in its notes to the financial
statements for the years ended June 30, 2000 and 1999.
As required, effective July 1, 1999, the Company adopted the new accounting
standard, AICPA Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities," which requires that the previously capitalized start-up costs to be
recognized as a cumulative effect of change in accounting principle and expensed
fully in the quarter. This resulted in a cumulative effect on net income of $0.6
million net of an income tax benefit of $0.4 million.
The Company is also required to adopt Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," by its first quarter ending September 30, 2000. This standard
requires the Company to record the fair value of its interest-rate swap as an
asset or liability in the consolidated balance sheet. Changes in the fair value
of the interest-rate swap will be reported as a component of shareholders'
equity in the consolidated balance sheet. The fair value of the Company's
existing interest-rate swap is $0.6 million as of June 30, 2000.
OPERATING TRENDS
SEASONALITY
The Company's business is seasonal to the extent of the impact of cashing tax
refund checks. The impact of these services is in the third and fourth quarters
of the Company's fiscal year.
IMPACT OF INFLATION
Management believes that the Company's results of operations are not dependent
upon the levels of inflation.
<PAGE>
FORWARD-LOOKING STATEMENTS
This Report contains, and from time to time the Company or certain of its
representatives may make, "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements are generally
identified by the use of words such as "anticipate," "expect," "estimate,"
"believe," "intend," and terms with similar meanings. Although the Company
believes that the current views and expectations reflected in these
forward-looking statements are reasonable, those views and expectations, and the
related statements, are inherently subject to risks, uncertainties, and other
factors, many of which are not under the Company's control and may not even be
predictable. Those risks, uncertainties, and other factors could cause the
actual results to differ materially from these in the forward-looking
statements. Those risks, uncertainties, and factors include, but are not limited
to, many of the matters described in this Report: the Company's relationships
with Travelers Express and its affiliates, with Goleta National Bank, and with
the Lenders; governmental regulation of check-cashing, short-term consumer
lending, and related financial services businesses; theft and employee errors;
the availability of suitable locations, acquisition opportunities, adequate
financing, and experienced management employees to implement the Company's
growth strategy; the fragmentation of the check-cashing industry and competition
from various other sources, such as banks, savings and loans, short-term
consumer lenders, and other similar financial services entities, as well as
retail businesses that offer products and services offered by the Company; and
customer demand and response to products and services offered by the Company.
The Company expressly disclaims any obligations to release publicly any updates
or revisions to these forward-looking statements to reflect any change in its
views or expectations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial market risks, particularly including changes
in interest rates that might affect the costs of its financing under the Credit
Agreement. To mitigate the risks of changes in interest rates, the Company
utilizes derivative financial instruments. The Company does not use derivative
financial instruments for speculative or trading purposes.
To reduce its risk of greater interest expense upon a rise in the prime rate or
LIBOR, the Company has entered into three interest-rate swap agreements with
Bank of America. Those agreements effectively converted a portion of the
Company's floating-rate interest obligations to fixed-rate interest obligations.
With respect to the revolving line-of-credit facility, the first notional amount
is $33 million for a two-year period that began January 4, 1999, and the second
notional amount is $10 million for a sixteen-month period that began September
3, 1999. The third notional amount under the term-loan facility is currently
$9.0 million, with decreases in calendar year 2000. The notional amounts were
determined based on the Company's minimum projected borrowings during calendar
years 1999 and 2000. The fixed rate applicable to the notional amount of $33
million under the revolving line-of-credit facility was 5.14% for calendar year
1999 and is 5.23% for calendar year 2000. The fixed rate applicable to the
notional amount of $10 million under the revolving line-of-credit facility was
6.00% for calendar year 1999 and is 6% for calendar year 2000. The fixed rate
applicable to the notional amount of $9.0 million under the term-loan facility
was 6.23% for calendar year 1999 and is 6.38% for calendar year 2000.
The fair value of the Company's existing interest-rate swaps is $0.6 million as
of June 30, 2000. Based on the average outstanding indebtedness in the previous
quarter, a 10% change in interest rates would have changed the Company's
interest expense by approximately $490,000 (pre-tax) for the year ended June 30,
2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14(a) 1 for information required for this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
<PAGE>
PART III
The information called for in Part III of this Form 10-K is incorporated by
reference from the Company's definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than
October 28, 2000 (120 days after the Company's fiscal year).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
1. Financial Statements.
------------------------
<S> <C>
Report of independent public accountants ............................................................ 38
Consolidated balance sheets as of June 30, 2000 and 1999............................................. 39
Consolidated statements of earnings for the years ended June 30, 2000, 1999, and 1998 ............... 40
Consolidated statements of shareholders' equity for the years ended June 30, 2000, 1999, and 1998.... 41
Consolidated statements of cash flows for the years ended June 30, 2000, 1999, and 1998 ............. 42
Notes to consolidated financial statements .......................................................... 43
</TABLE>
2. Financial Statement Schedules.
---------------------------------
All schedules have been omitted as inapplicable or because the
information required to be included therein is shown in the Financial Statements
or Notes to Consolidated Financial Statements.
3. Exhibits.
------------
Exhibit Number Exhibits
-------------- --------
3.1 Restated Articles of Incorporation of the Company, as amended through
January 31, 1998. (Included as Exhibit 3.6 to the Company's Form 10-Q
as of December 31, 1997 (Commission File Number 0-20774) and
incorporated herein by reference.)
3.2 Amended and Restated Bylaws of the Company, as amended through January
31, 1998. (Included as Exhibit 3.7 to the Company's Form 10-Q as of
December 31, 1997 (Commission File Number 0-20774) and incorporated
herein by reference.)
3.3 Certificate of Amendment to the Company's Bylaws dated January 3, 2000.
(Included as Exhibit 3.3 to the Company's Form 10-Q as of December 31,
1999 (Commission File Number 0-20774) and incorporated herein by
reference.)
4.1 Form of Certificate representing shares of Registrant's Common Stock.
(Included as Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-53286) (the "Registration Statement") and
incorporated herein by reference.)
10.1 Ace Cash Express, Inc. 1987 Stock Option Plan, as amended (including
form of Incentive Stock Option Agreement). (Included as Exhibit 10.1 to
the Registration Statement and incorporated herein by reference.)#
10.2 1992 Master Agreement dated October 14, 1992 (the "Money Order
Agreement") between the Company and American Express Travel Related
Services Company, Inc. (the "Money Order Supplier"). (Confidential
treatment for a portion of this document has been granted by the
Securities and Exchange Commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934) (Included as Exhibit 10.4 to the
Registration Statement and incorporated herein by reference.)
<PAGE>
10.3 Agreement Regarding Stock Pledges dated as of November 20, 1992,
between the Company and the shareholders pledging shares of Common
Stock to secure the performance of the Company's obligations under the
Money Order Agreement. (Included as Exhibit 10.7 to the Registration
Statement and incorporated herein by reference.)
10.4 Lease Agreement dated October 1, 1987, between the Company and Greenway
Tower Joint Venture, as amended by First Amendment to Lease Agreement
dated April 29, 1988, Second Amendment to Lease Agreement dated August
24, 1988, Third Amendment to Lease Agreement dated December 29, 1988
and Fourth Amendment to Lease Agreement dated January 29, 1991.
(Included as Exhibit 10.8 to the Registration Statement and
incorporated herein by reference.)
10.5 First Amendment to the Money Order Agreement dated December 1,1992,
between the Company and the Money Order Supplier. (Included as Exhibit
10.9 to the Registration Statement and incorporated herein by
reference.)
10.6 Agreement for Purchase and Sale of Stock Assets dated January 2, 1992,
between T.J. Martin ("Martin") and R.C. Hemmig ("Hemmig"). (Included as
Exhibit 10.10 to the Registration Statement and incorporated herein by
reference.)
10.7 Option to Repurchase, dated January 2, 1992, in favor of Hemmig.
(Included as Exhibit 10.12 to the Registration Statement and
incorporated herein by reference.)
10.8 Irrevocable Proxy of Martin dated January 2, 1992 in favor of Hemmig.
(Included as Exhibit 10.13 to the Registration Statement and
incorporated by reference herein.)
10.9 Letter Agreement between First Data Corporation and the Company dated
December 6, 1993, amending the First Amendment to the Money Order
Agreement. (Included as Exhibit 10.9 to the Company's Form 10-K as of
June 30, 1994 (Commission File Number 0-20774) and incorporated herein
by reference.)
10.10 Fifth Amendment to Lease Agreement dated June 13, 1994, between the
Company and Greenway Tower Joint Venture. (Included as Exhibit 10.10 to
the Company's Form 10-K as of June 30, 1994 (Commission File Number
0-20774) and incorporated herein by reference.)
10.11 Asset Purchase Agreement dated November 22, 1993, among the Company,
sole proprietor, limited partnership, and general partnerships that
conduct business under the name "Mr. Money Check Cashers" (the
"Sellers"), general partners of the partnership sellers (the "General
Partners"), and an individual agent for the Sellers and the General
Partners (the "Agent"). (Included as Exhibit 2.1 in the Company's Form
8-K filed on December 7, 1993 (Commission File Number 0-20774) and
incorporated herein by reference.)
10.12 Food Stamp Sub-Contract Agreement dated November 22, 1993, between the
Company and the Agent. (Included as Exhibit 2.2 to the Company's Form
8-K filed on December 7,1993 (Commission File Number 0-20774) and
incorporated herein by reference.)
10.13 Ace Cash Express, Inc. 401(k) Profit Sharing Plan, adopted July 1,
1994. (Included as Exhibit 10.13 to the Company's Form 10-K as of June
30, 1994 (Commission File Number 0-20774) and incorporated herein by
reference.)#
10.14 Ace Cash Express, Inc. Deferred Compensation Plan, adopted July 1,
1994. (Included as Exhibit 10.14 to the Company's Form 10-K as of June
30, 1994 (Commission File Number 0-20774) and incorporated herein by
reference.)#
10.15 Asset Purchase Agreement dated June 27, 1995, among the Company and
Quick Cash, Inc., Q.C. & G. Financial, Inc., David Christenholz and
Gloria Guerra-Leyva. (Included as Exhibit 2.1 to the Company's Form 8-K
filed on July 11, 1995 (Commission File Number 0-20774) and
incorporated herein by reference.)
10.16 Escrow Agreement dated June 27, 1995, among the Company, Quick Cash,
Inc., Q.C. & G. Financial, Inc., David Christenholz, Gloria
Guerra-Leyva, and Bank One, Arizona, NA, as escrow agent. (Included as
Exhibit 2.2 to the Company's Form 8-K filed July 11, 1995 (Commission
File Number 0-20774) and incorporated herein by reference.)
<PAGE>
10.17 Promissory Note dated June 27, 1995, of the Registrant in favor of the
Money Order Supplier. (Included as Exhibit 2.3 to Form 8-K filed July
11, 1995 and incorporated herein by reference.)
10.18 Second Amendment to the Money Order Agreement dated September 8, 1995,
between the Company and the Money Order Supplier. (Included as Exhibit
10.18 to the Company's Form 10-K as of June 30, 1995 (Commission File
Number 0-20774) and incorporated herein by reference.)
10.19 Ace Cash Express, Inc. Non-Employee Directors Stock Option Plan dated
March 27, 1995. (Included as Exhibit 10.19 to the Company's Form 10-K
as June 30, 1995 (Commission File Number 0-20774) and incorporated
herein by reference.)
10.20 Letter Agreement dated July 13, 1995, between First Data Corporation
and the Company amending the Money Order Agreement. (Included as
Exhibit 10.20 to the Company's Form 10-K as of June 30, 1995
(Commission File Number 0-20774) and incorporated herein by reference.)
10.21 Letter Agreement dated February 1, 1996, between the Company and the
Money Order Supplier amending the Money Order Agreement. (Included as
Exhibit 10.21 to the Company's Form 10-Q as of December 31, 1995
(Commission File Number 0-20774) and incorporated herein by reference.)
10.22 1996 MoneyGram Master Agreement dated February 1, 1996, between the
Company and the Money Order Supplier (the "MoneyGram Agreement").
(Included as Exhibit 10.22 to the Company's Form 10-Q as of December
31, 1995 (Commission File Number 0-20774) and incorporated herein by
reference.)
10.23 Agreement and Plan of Merger dated October 13, 1995, among the Company,
Check Express, Inc., and Ace Acquisition Corporation. (Included as
Exhibit 2.1 to the Company's Form 8-K filed on February 16,1996
(Commission File Number 0-20774) and incorporated herein by reference.)
10.24 Amendment (to Agreement and Plan of Merger) dated December 20, 1995,
among the Company, Check Express, Inc., and Ace Acquisition
Corporation. (Included as Exhibit 2.2 to the Company's Form 8-K filed
on February 16, 1996 (Commission File Number 0-20774) and incorporated
herein by reference.)
10.25 Sixth Amendment to Lease Agreement dated February 1, 1996, between the
Company and Greenway Tower Joint Venture. (Included as Exhibit 10.25 to
the Company's Form 10-Q as of March 31, 1996 (Commission File Number
0-20774) and incorporated herein by reference.)
10.26 1996-A Amendment to the MoneyGram Agreement dated March 21, 1996,
between the Company and the Money Order Supplier. (Included as Exhibit
10.26 to the Company's Form 10-K as of June 30, 1996 (Commission File
Number 0-20774) and incorporated herein by reference.)
10.27 1996-B Amendment to the MoneyGram Agreement dated June 27, 1996,
between the Company and the Money Order Supplier. (Included as Exhibit
10.27 to the Company's Form 10-K as of June 30, 1996 (Commission file
Number 0-20774) and incorporated herein by reference.)
10.28 Note Purchase Agreement dated November 15, 1996, between the Company
and Principal Life Insurance Company. (Included as Exhibit 10.28 to the
Company's Form 10-Q as of December 31, 1996 (Commission File Number
0-20774) and incorporated herein by reference.)
10.29 Form of 9.03% Senior Secured Notes due November 15, 2003. (Included as
Exhibit 10.29 to the Company's Form 10-Q as of December 31, 1996
(Commission File Number 0-20774) and incorporated herein by reference.)
10.30 Collateral Trust Agreement dated November 15, 1996, among the Company
and the Money Order Supplier, Principal Life Insurance Company, and
Wilmington Trust Company. (Included as Exhibit 10.30 to the Company's
Form 10-Q as of December 31, 1996 (Commission File Number 0-20774) and
incorporated herein by reference.)
10.31 Assignment of Deposit Accounts and Security Agreement dated November
15, 1996, between the Company and Wilmington Trust Company. (Included
as Exhibit 10.31 to the Company's Form 10-Q as of December 31, 1996
(Commission File Number 0-20774) and incorporated herein by reference.)
10.32 Third Amendment to the Money Order Agreement dated November 15, 1996,
between the Company and the Money Order Supplier. (Included as Exhibit
10.32 to the Company's Form 10-Q as of December 31, 1996 (Commission
File Number 0-20774) and incorporated herein by reference.)
<PAGE>
10.33 Amendment No.1 to the Ace Cash Express 401K Profit Sharing Plan
effective January 1, 1998. (Included as Exhibit 10.33 to the Company's
Form 10-Q as of March 31, 1998 (Commission File Number 0-20774) and
incorporated herein by reference.)#
10.34 Amendment No. 1 to Ace Cash Express, Inc. Non-Employee Directors Stock
Option Plan. (Included as Exhibit 10.34 to the Company's Form 10-K as
of June 30, 1998 (Commission File No. 0-20774) and incorporated herein
by reference.) #
10.35 Amendment No. 2 to Ace Cash Express, Inc. Non-Employee Directors Stock
Option Plan. (Included as Exhibit 10.35 to the Company's Form 10-K as
of June 30, 1998 (Commission File No. 0-20774) and incorporated herein
by reference.) #
10.36 Ace Cash Express, Inc. 1997 Stock Option Plan. (Included as Exhibit A
to the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders (Commission File No. 0-20774) and incorporated herein by
reference.)#
10.37 Amendment No. 1 to Ace Cash Express, Inc. 1997 Stock Option Plan.
(Included as Exhibit 10.37 to the Company's Form 10-K as of June 30,
1998 (Commission File No. 0-20774) and incorporated herein by
reference.) #
10.38 Form of Change-in-Control Executive Severance Agreement between the
Company and each of its three executive officers. (Included as Exhibit
10.38 to the Company's Form 10-K as of June 30, 1998 (Commission File
No. 0-20774) and incorporated herein by reference.) #
10.39 Money Order Agreement dated as of April 16, 1998, but effective as of
December 16, 1998, between the Company and Travelers Express Company,
Inc. (Confidential treatment for a portion of this document has been
granted by the Securities and Exchange Commission pursuant to Rule
24b-2 under the Securities Exchange Act of 1934). (Included as Exhibit
10.39 to the Company's Form 10-K as of June 30, 1998 (Commission File
No. 0-20774) and incorporated herein by reference.)
10.40 Credit Agreement dated as of July 31, 1998, but effective as of
December 16, 1998, among the Company, Wells Fargo Bank (Texas),
National Association, as agent (the "Credit Agent"), and the lenders
named therein, with Exhibits A and B thereto and Schedules 2.01(a) and
2.01(b) thereto. (Included as Exhibit 10.40 to the Company's Form 10-K
as of June 30, 1998 (Commission File No. 0-20774) and incorporated
herein by reference.)
10.41 Amended and Restated Collateral Trust Agreement dated as of July 31,
1998, but effective as of December 16, 1998, among the Company, the
Credit Agent, Travelers Express Company, Inc., Principal Life Insurance
Company (formerly known as Principal Mutual Life Insurance Company),
and Wilmington Trust Company. (Included as Exhibit 10.41 to the
Company's Form 10-K as of June 30, 1998 (Commission File No. 0-20774)
and incorporated herein by reference.)
10.42 Amended and Restated Assignment of Deposit Accounts and Security
Agreement dated as of July 31, 1998, but effective as of December 16,
1998, between the Company and Wilmington Trust Company. (Included as
Exhibit 10.42 to the Company's Form 10-K as of June 30, 1998
(Commission File No. 0-20774) and incorporated herein by reference.)
10.43 First Amendment to Credit Agreement dated as of December 16, 1998,
among the Company, the Credit Agent, and the lenders named therein,
with Schedules 2.01(a) and 2.01(b) thereto. (Included as Exhibit 10.43
to the Company's Form 8-K filed on December 23, 1998 (Commission File
No. 0-20774) and incorporated herein by reference.)
10.44 Amendment No. 3 to Ace Cash Express, Inc. Non-Employee Directors Stock
Option Plan. (Included as Exhibit 10.44 to the Company's Form 10-Q as
of December 31, 1998 (Commission File No. 0-20774) and incorporated
herein by reference.)#
10.45 Amendment No. 2 to Ace Cash Express, Inc. 1997 Stock Option Plan.
(Included as Exhibit 10.45 to the Company's Form 10-Q as of December
31, 1999 (Commission File Number 0-20774) and incorporated herein by
reference.)#
10.46 Second Amendment to Credit Agreement dated as of December 15, 1999,
among the Company, the Credit Agent , and the lenders named therein,
with Schedules 2.01(a) and 2.01(b) thereto. (Included as Exhibit 10.46
to the Company's Form 10-Q as of December 31, 1999 (Commission File
Number 0-20774) and incorporated herein by reference.)
<PAGE>
10.47 Master Loan Agency Agreement dated as of August 11, 1999, between the
Company and Goleta National Bank. (Confidential treatment for a portion
of this document has been granted by the Securities and Exchange
Commission pursuant to Rule 24b-2 under the Securities Exchange Act of
1934.)*
10.48 Money Transfer Agreement dated as of June 30, 2000, among the Company,
Travelers Express Company, Inc., and MoneyGram Payment Systems, Inc.
(Confidential treatment for a portion of this document has been granted
by the Securities and Exchange Commission pursuant to Rule 24b-2 under
the Securities Exchange Act of 1934.)*
10.49 Change-in-Control Executive Severance Agreement dated as of August 17,
2000, between the Company and Debra A. Bradford.*#
27 Financial Data Schedule (EDGAR version only)*
------
* Filed herewith
# Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ACE CASH EXPRESS, INC.
By: /s/ DEBRA A. BRADFORD
-----------------------------
Debra A. Bradford
Senior Vice President
and Chief Financial Officer
Date: September 27, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ RAYMOND C. HEMMIG Chairman of the Board, Director
---------------------
Raymond C. Hemmig
/s/ DONALD H. NEUSTADT Chief Executive Officer,
---------------------- Director (Principal Executive Officer)
Donald H. Neustadt
/s/ JAY B. SHIPOWITZ President and Chief Operating Officer
--------------------
Jay B. Shipowitz Director
/s/ DEBRA A. BRADFORD Senior Vice President and Chief Financial Officer
--------------------- Treasurer and Secretary (Principal Financial and
Debra A. Bradford Accounting Officer)
/s/ HOWARD W. DAVIS Director
-------------------
Howard W. Davis
/s/ MARSHALL B. PAYNE Director
---------------------
Marshall B. Payne
/s/ EDWARD W. ROSE III Director
----------------------
Edward W. Rose III
/s/ CHARLES DANIEL YOST Director
-----------------------
Charles Daniel Yost
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Ace Cash Express, Inc.:
We have audited the accompanying consolidated balance sheets of Ace Cash
Express, Inc. (a Texas corporation) and subsidiaries as of June 30, 2000 and
1999, and the related consolidated statements of earnings, shareholders' equity
and cash flows for each of the three years in the period ended June 30, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ace Cash Express,
Inc. and subsidiaries as of June 30, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 2000, in conformity with accounting principles generally accepted in
the United States.
As explained in Note 1 to the consolidated financial statements, effective
July 1, 1999, the Company changed its method of accounting for costs of start-up
activities.
ARTHUR ANDERSEN LLP
Dallas, Texas,
August 9, 2000
<PAGE>
<TABLE>
<CAPTION>
ACE CASH EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
JUNE 30, JUNE 30,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 105,577 $ 59,414
Accounts receivable, net 5,985 4,224
Loans receivable 18,695 5,543
Prepaid expenses and other current assets 2,069 1,701
Inventories 1,418 1,511
------------ ------------
Total Current Assets 133,744 72,393
------------ ------------
Noncurrent Assets
Property and equipment, net 36,915 30,372
Covenants not to compete, net 1,429 1,656
Excess of purchase price over fair value of assets acquired, net 45,929 36,690
Other assets 3,406 4,122
------------ ------------
Total Assets $ 221,423 $ 145,233
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Revolving advances $ 95,000 $ 40,100
Accounts payable, accrued liabilities, and other current 21,242 15,903
liabilities
Money order principal payable 10,487 5,340
Current portion of senior secured notes payable 4,180 4,226
Term advances 3,469 1,969
Notes payable 898 330
------------ ------------
Total Current Liabilities 135,276 67,868
------------ ------------
Noncurrent Liabilities
Long-term portion of senior secured notes payable 12,000 16,000
Long-term term advances 15,031 8,531
Long-term notes payable 438 -
Other liabilities 3,519 4,560
------------ ------------
Total Liabilities 166,264 96,959
------------ ------------
Commitments and Contingencies
Shareholders' Equity
Preferred stock, $1 par value, 1,000,000 shares authorized, none
issued and outstanding - -
Common stock, $.01 par value, 20,000,000 shares authorized,
9,984,563 and 10,055,528 shares issued and outstanding,
respectively 100 101
Additional paid-in capital 22,715 21,691
Retained earnings 34,745 26,482
Treasury stock, at cost, 181,400 and 0 shares, respectively (2,401) -
------------ ------------
Total Shareholders' Equity 55,159 48,274
------------ ------------
Total Liabilities and Shareholders' Equity $ 221,423 $ 145,233
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
ACE CASH EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except share and per share amounts)
YEAR ENDED JUNE 30,
----------------------------------------------
2000 1999 1998
------------- ------------ ------------
<S> <C> <C> <C>
Revenues $140,636 $122,314 $100,194
Store expenses:
Salaries and benefits 38,639 32,435 27,975
Occupancy 21,507 18,381 15,204
Depreciation 5,429 4,728 4,083
Other 29,093 25,399 19,841
------------- ------------ ------------
Total store expenses 94,668 80,943 67,103
------------- ------------ ------------
Store gross margin 45,968 41,371 33,091
Region expenses 11,119 9,369 8,353
Headquarters expenses 8,247 7,673 7,198
Franchise expenses 1,063 1,288 965
Other depreciation and amortization 3,798 4,236 3,502
Interest expense, net 6,123 4,476 2,437
Other expenses 955 689 49
------------- ------------ ------------
Income before income taxes and cumulative
effect of accounting change 14,663 13,640 10,587
Income taxes 5,797 5,390 4,185
------------- ------------ ------------
Income before cumulative effect of
accounting change 8,866 8,250 6,402
Cumulative effect of accounting change, net
of income tax benefit of $402 (603) - -
------------- ------------ ------------
Net income $ 8,263 $ 8,250 $ 6,402
============= ============ ============
BASIC EARNINGS PER SHARE
Before cumulative effect of accounting change $ .88 $ .83 $ .66
Cumulative effect of accounting change (.06) - -
------------- ------------ ------------
Basic earnings per share $ .82 $ .83 $ .66
============= ============ ============
Weighted average number of common
shares outstanding - basic EPS 10,067 9,989 9,759
============= ============ ============
DILUTED EARNINGS PER SHARE
Before cumulative effect of accounting change $ .86 $ .80 $ .63
Cumulative effect of accounting change (.06) - -
------------- ------------ ------------
Diluted earnings per share $ .80 $ .80 $ .63
============= ============ ============
Weighted average number of common
and dilutive shares outstanding - diluted EPS 10,361 10,283 10,215
============= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
ACE CASH EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except shares)
COMMON STOCK TREASURY STOCK
-------------------------- -----------------------
ADDITIONAL TOTAL
PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
------------ ---------- ----------- ---------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1997 9,668,612 $ 96 $19,130 $11,830 - $ - $31,056
Stock options exercised 213,549 3 1,490 - - - 1,493
Net income - - - 6,402 - - 6,402
------------ ---------- ----------- ---------- -------- ---------- ---------------
BALANCE, JUNE 30, 1998 9,882,161 99 20,620 18,232 - - 38,951
Stock options exercised 173,367 2 1,071 - - - 1,073
Net income - - - 8,250 - - 8,250
------------ ---------- ----------- ---------- -------- ---------- ---------------
BALANCE, JUNE 30, 1999 10,055,528 21,691 26,482 - -
101 48,274
Stock options exercised 110,435 1 1,024 - - - 1,025
Shares repurchased, at
cost (181,400) (2) - - 181,400 (2,401) (2,403)
Net income - - - 8,263 - - 8,263
------------ ---------- ----------- ---------- -------- ---------- ---------------
BALANCE, JUNE 30, 2000 9,984,563 $100 $22,715 $34,745 181,400 ($2,401) $55,159
============ ========== =========== ========== ======== ========== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
ACE CASH EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED JUNE 30,
------------- ------------- ------------
2000 1999 1998
------------- ------------- ------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 8,263 $ 8,250 $ 6,402
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 9,227 8,970 7,592
Cumulative effect of accounting change 1,005 - -
Deferred tax benefit 322 218 (749)
Deferred revenue (3,485) (2,202) (1,534)
Changes in assets and liabilities:
Accounts receivable, net (1,761) (105) (846)
Loans receivable (13,152) (805) (552)
Prepaid expenses (824) (804) 8
Inventories 93 938 (397)
Other assets (321) (1,297) 1,317
Accounts payable and other liabilities 7,361 3,926 2,969
------------- ------------- ------------
Net cash provided by operating activities 6,728 17,089 14,210
Cash flows from investing activities:
Purchases of property and equipment, net (12,255) (10,089) (5,742)
Cost of net assets acquired (11,359) (8,378) (4,708)
Investment in ePacific (1,000) - -
------------- ------------- ------------
Net cash used by investing activities (24,614) (18,467) (10,450)
Cash flows from financing activities:
Net borrowings from (repayments to) money order supplier 5,147 (3,978) 971
Net borrowings from revolving line-of-credit 54,900 - -
Term advances from syndicate of banks 8,000 10,500 708
Payment of term advances from previous money order supplier - (7,073) (1,844)
Net borrowings (repayments) of acquisition-related notes 1,006 102 (414)
payable
Repayments under senior secured notes payable (4,046) - -
Proceeds from stock options exercised 1,025 1,073 1,493
Purchase of treasury stock (1,983) - -
------------- ------------- ------------
Net cash provided by financing activities 64,049 624 914
------------- ------------- ------------
Net increase (decrease) in cash and cash equivalents 46,163 (754) 4,674
Cash and cash equivalents, beginning of year 59,414 60,168 55,494
------------- ------------- ------------
Cash and cash equivalents, end of year $105,577 $59,414 $60,168
============= ============= ============
Supplemental disclosures of cash flows information:
Interest paid $ 7,373 $ 5,202 $ 2,663
Income taxes paid 5,420 4,395 3,508
Supplemental schedule of non-cash investing activities:
Liabilities incurred in connection with acquired stores $ 2,097 $ 433 $ 439
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
ACE CASH EXPRESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
Ace Cash Express, Inc. (the "Company") was incorporated under the laws of the
state of Texas in March 1982. The Company operates in one line of business with
two segments (Company-owned and franchised operations) and provides retail
financial services, such as check cashing, small consumer loans, bill-payments,
money orders, wire transfers, and other transactional services to customers for
a fee. On June 30, 2000, the Company owned and operated 915 stores in 26 states
and the District of Columbia, and had 157 franchised stores.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Operating Segments
In June 1997, Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information," was
issued effective for fiscal years ending after December 15, 1998. The Company's
reportable segments are strategic business units that differentiate between
company-owned and franchised stores. The accounting policies of the segments are
the same as those described in the summary of significant accounting policies.
Segment information for the years ended June 30, 2000, 1999, and 1998 was as
follows:
<TABLE>
<CAPTION>
COMPANY-OWNED FRANCHISED TOTAL
------------- ---------- -----
(in thousands, except store amounts)
<S> <C> <C> <C>
YEAR ENDED JUNE 30, 2000:
-------------------------
Revenue $138,099 $2,537 $140,636
Operating income 24,065 1,474 25,539
Total assets 217,456 3,967 221,423
Number of stores 915 157 1,072
YEAR ENDED JUNE 30, 1999:
-------------------------
Revenue $120,197 $2,117 $122,314
Operating income 22,212 829 23,041
Total assets 142,451 2,782 145,233
Number of stores 798 120 918
YEAR ENDED JUNE 30, 1998:
-------------------------
Revenue $98,529 $1,665 $100,194
Operating income 15,875 700 16,575
Total assets 132,799 1,836 134,635
Number of stores 683 89 772
</TABLE>
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses. Actual results could differ from
those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid investment securities purchased with an original maturity of three months
or less to be cash equivalents.
Accounts Receivable, Net
Accounts receivable on the consolidated balance sheets as of June 30, 2000 and
1999 were $6.0 million and $4.2 million, respectively, and include the MoneyGram
receivable and other notes receivable, net of an allowance for doubtful
accounts.
Loans Receivable
Loans receivable on the consolidated balance sheets as of June 30, 2000 and 1999
were $18.7 million and $5.5 million, respectively. Loans receivable includes
receivables for the Company's payday loan product and the Company's interest in
the Bank Loans made by Goleta National Bank. Loan losses for the fiscal years
ended June 30, 2000 and 1999 were $4.2 million and $2.8 million, respectively.
The Company accounts for the full amount of loans not paid on the due date as a
loan loss in that period.
Through the "payday loan" product, the Company provides the customer cash in
exchange for that customer's check (in the amount of that cash plus a service
fee) with an agreement to defer the presentment or deposit of that check until
the customer's next payday, usually a period of two to four weeks. As of June
30, 2000 and 1999, the receivable for payday loans was approximately $0.8
million and $5.5 million, respectively.
In August 1999, the Company entered into a Master Loan Agency Agreement (the
"Goleta Agreement") with Goleta National Bank, a national bank located in
Goleta, California ("Goleta"). Under the Goleta Agreement, the parties agreed to
develop and implement an arrangement under which short-term loans made by Goleta
would be offered at the Company's owned locations. Currently, a Bank Loan may be
up to $500 and must be repaid or renewed in 14 days. Under the Goleta Agreement,
the Company purchases from Goleta a participation representing a material and
significant portion of each Bank Loan made on a previous day. An interest rate
of 15% per $100 of Bank Loan is charged for each 14 day loan. As of June 30,
2000, the receivable for Bank Loans was $17.9 million.
Inventories
Inventories consist of unsold lottery tickets and other inventory. Lottery
tickets are stated at purchase price and accounted for using the specific
identification method. Other inventories are stated at cost and utilize the
first-in, first-out method. No provision for obsolescence is considered
necessary.
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
2000 1999
--------------- --------------
(in thousands)
<S> <C> <C>
Lottery tickets inventory $1,061 $1,211
Other inventory 357 300
--------------- --------------
$1,418 $1,511
=============== ==============
</TABLE>
<PAGE>
Property and Equipment
Depreciation and amortization of property and equipment is based on the lesser
of the estimated useful lives of the respective assets or lease terms. The
useful lives of property and equipment by class are as follows: store equipment,
furniture and fixtures, four to ten years; leasehold improvements, the lesser of
ten years or the term of the lease; signs, eight years; and other property and
equipment, five to ten years. Depreciation is calculated on a straight-line
basis.
Intangible Assets
The excess of the purchase price over fair value of net assets acquired is being
amortized on the straight-line method over 30 years. Covenants not to compete
are amortized over the applicable period of the contract, generally ranging from
two to five years. Company management annually evaluates the useful lives of
intangible assets, their carrying values, and their expected benefits in
relation to the results of operations. The unamortized cost of impaired
intangible assets is charged to expense when impairment occurs.
As required, the Company adopted a new accounting standard, AICPA Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities," effective
July 1, 1999. This standard requires that previously capitalized start-up costs
be recognized as a cumulative effect of change in accounting principle and
expensed fully in the quarter. Start-up costs, net of tax, of $0.6 million were
expensed in the first quarter ended September 30, 1999. On a pro forma basis,
the Company's net income would have been $8.9 million ($0.88 per share), $8.0
million ($0.80 per share) and $6.2 million ($0.64 per share) for the years ended
June 30, 2000, 1999 and 1998, respectively, if this accounting change had been
retroactively applied.
Store Expenses
The direct costs incurred in operating the stores have been classified as store
expenses and are deducted from total revenues to determine contribution
attributable to the stores. Store expenses include salary and benefit expense of
store employees, rent and other occupancy costs, depreciation of store property,
bank charges, armored and security costs, loan losses, net returned checks, cash
shortages, and other costs incurred by the stores.
Franchise Accounting
The Company includes franchise fees in revenues. Franchise fees include initial,
territory, and future optional store fees as well as continuing franchise fees
("royalty fees") and research and development fees. The Company offers both
nonexclusive and exclusive franchise arrangements.
Initial fees are recognized when the Company has provided substantially all of
its initial services in accordance with the franchise agreements. Generally,
this occurs when the related sites have been approved or identified and the
franchisee has completed the training required by the Company. Related direct
costs, such as sales commissions, are deferred until revenue is recognized.
Royalty fees are recognized as revenues as they are earned under the franchise
agreements. For the years ended June 30, 2000 and 1999, approximately $2.5
million and $2.1 million, respectively, of franchise revenue was recognized.
Cash payments received under franchise agreements prior to the completion of the
earnings process are deferred until the initial fees are recognized in
accordance with the preceding paragraph.
Income Taxes
The Company has implemented the provisions of SFAS No. 109, "Accounting for
Income Taxes." SFAS No. 109 utilizes an asset and liability approach, and
deferred taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of the enacted tax laws.
<PAGE>
In accordance with the provisions of SFAS No. 109, a valuation allowance should
be recognized, if it is more likely than not that some portion or all of a
deferred tax asset will not be realized. The Company recorded no valuation
allowance as of June 30, 2000 or 1999.
Returned Checks
The Company charges operations for potential losses on returned checks in the
period such checks are returned, since ultimate collection of these items is
uncertain. Recoveries on returned checks are credited in the period when the
recovery is received.
Software Development Costs
The Company capitalizes the external direct costs of materials and services
consumed in developing or obtaining internal-use computer software and payroll
and payroll-related costs for employees who are directly associated with and who
devote time to the internal-use computer software project, to the extent of the
time spent directly on the project. For the years ended June 30, 2000 and 1999,
the Company capitalized $1.4 million and $0.5 million, respectively.
Earnings Per Share
Earnings per share have been computed based on the weighted average number of
common and dilutive shares outstanding for the respective periods. Dilutive
shares include employee and director stock options.
Basic earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share are
computed by dividing net income by the weighted average number of common shares
outstanding, after adjusting for the dilutive effect of stock options. The
following table presents the reconciliation of the numerator and denominator
used in the calculation of basic and diluted earnings per share, as required by
SFAS No. 128, "Earnings Per Share."
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
2000 1999 1998
---------- --------- ----------
(in thousands)
<S> <C> <C> <C>
Income before cumulative effect of accounting
change (numerator) $8,866 $8,250 $6,402
========== ========== ==========
Reconciliation of denominator:
Weighted average number of common shares
outstanding - basic EPS 10,067 9,989 9,759
Effect of dilutive stock options 294 294 456
---------- ---------- ----------
Weighted average number of common and
dilutive shares outstanding - diluted EPS 10,361 10,283 10,215
========== ========== ==========
</TABLE>
Fair Value of Financial Instruments
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than a forced sale or liquidation. The amounts reported in the
consolidated balance sheets for trade receivables, trade payables, notes
receivable, revolving advances, money order payable, and notes payable all
approximate fair value. The fair value of the interest-rate swap is $0.6
million.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
<PAGE>
2. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
JUNE 30,
----------------------------------
2000 1999
--------------- --------------
(in thousands)
<S> <C> <C>
Property and equipment, at cost:
Store equipment, furniture and fixtures $32,046 $25,626
Leasehold improvements 22,795 17,548
Signs 5,606 5,121
Other 445 829
--------------- --------------
60,892 49,124
Less - accumulated depreciation and amortization (23,977) (18,752)
--------------- --------------
$36,915 $30,372
=============== ==============
</TABLE>
Depreciation expense was $6.4 million and $5.6 million in fiscal 2000 and 1999,
respectively.
3. ACQUISITIONS AND DISPOSITIONS
During the year ended June 30, 2000, the Company acquired the assets of 36
stores in eight separate purchases from third parties for approximately $11.4
million. During the year ended June 30, 1999, the Company acquired the assets of
35 stores in ten separate purchases from third parties for approximately $8.4
million. During the year ended June 30, 1998, the Company acquired the assets of
15 stores in six separate purchases from third parties for approximately $4.7
million.
As a condition of each purchase, the sellers agreed not to compete with the
Company for specified periods ranging from two to five years. All acquisitions
have been accounted for using the purchase method of accounting. Covenants not
to compete were valued at contractually agreed upon amounts which management
believes correspond to fair value. In connection with the above acquisitions, in
fiscal 2000, acquisition costs of $10.8 million were allocated to goodwill and
the remainder to other assets.
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
2000 1999
-------------- --------------
(in thousands)
<S> <C> <C>
Covenants not to compete, at cost $6,549 $5,864
Less - accumulated amortization (5,120) (4,208)
----------- -----------
$1,429 $1,656
=========== ===========
</TABLE>
The excess purchase price over fair value of net assets acquired is as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
2000 1999
----------- -----------
(in thousands)
<S> <C> <C>
Excess of purchase price over fair value
of net assets $51,745 $40,995
Less - accumulated amortization (5,816) (4,305)
----------- -----------
$45,929 $36,690
=========== ===========
</TABLE>
4. FINANCING ARRANGEMENTS AND GUARANTEES
Senior Secured Notes Payable
The Company has outstanding $16 million of 9.03% Senior Secured Notes ("Notes")
issued to Principal Life Insurance Company (formerly known as Principal Mutual
Life Insurance Company) ("Principal") under a Note Purchase Agreement. The
original $20 million principal amount of the Notes is due in five equal annual
installments of $4 million each, which began November 15, 1999. Interest
payments are due semiannually, beginning May 15, 1997. The Notes include various
restrictive covenants. The Company is in compliance with these restrictive
covenants. There is $180,000 and $226,000 of accrued interest on these notes as
of June 30, 2000 and 1999, respectively.
The Notes are secured by a security interest in substantially all the assets of
the Company. The collateral arrangements are subject to the Amended and Restated
Collateral Trust Agreement dated as of July 31, 1998 (the "Amended Collateral
Trust Agreement") that was signed with the Credit Agreement. The Amended
Collateral Trust Agreement created a collateral trust, with Wilmington Trust
Company as trustee, to secure the Company's obligations under the Credit
Agreement and to the Company's two other secured lenders, Principal and
Travelers Express Company, Inc. The Amended Collateral Trust Agreement includes
agreements regarding the priority of distributions to the secured lenders upon
foreclosure and liquidation of the collateral subject thereto and certain other
intercreditor arrangements. The Company also executed an Amended and Restated
Assignment of Deposit Accounts and Security Agreement with Wilmington Trust
Company to grant the trustee a security interest in the same collateral that
secures the Company's obligations under the Credit Agreement.
Money Order Agreement
In April 1998, the Company signed a money order agreement with Travelers Express
Company, Inc. ("Travelers Express"), effective December 17, 1998. This agreement
replaced the previous money order agreement with the previous money order
supplier that was terminated as of December 16, 1998. Under this new five-year
agreement, the Company exclusively sells Travelers Express money orders, which
bear the Company's logo. The Company also signed a five-year agreement with
Travelers Express, effective in April 1998, to offer an electronic bill-payment
service to the Company's customers. In conjunction with these two agreements,
the Company received $3 million from Travelers Express in April 1998, $0.4
million per year for the fiscal years ended June 30, 2000 and 1999, and is
entitled to receive an additional $0.4 million per year for the next three
years. The $3 million payment was deferred and included in other liabilities in
the consolidated balance sheets. If the money order agreement is terminated
under certain circumstances before the expiration of its five-year term, the
Company will be obligated to repay a portion of the $3 million and the annual
amounts received from Travelers Express. The money order agreement with
Travelers Express (unlike the previous money order agreement) does not allow an
extended deferral of remittances of money order proceeds. The Company's payment
and other obligations to Travelers Express under the money order agreement are
secured by a subordinated lien on the Company's assets. The total $5 million
from Travelers Express is being amortized on a straight-line basis over the
five-year term of the agreements beginning January 1999.
Notes Payable
Notes payable, related to acquired stores, bear interest at 5%, and are due six
months after acquisition, with the exception of one non-interest-bearing note
with a balance of $700,000 which is payable in monthly installments of $20,000
until maturity on May 1, 2003. Interest was imputed on this note at an interest
rate of 5%. Notes payable were approximately $1.3 million and $0.3 million,
respectively, as of June 30, 2000 and 1999.
<PAGE>
Credit Facilities
In July 1998, the Company signed an agreement ("Credit Agreement") with a
syndicate of banks, led by Wells Fargo Bank (Texas), National Association, and
the credit facilities under the Credit Agreement were renewed in December 1999.
This Credit Agreement provides a senior secured credit facility of $165 million
of financing to the Company. The Credit Agreement contains a committed Revolving
Facility of $130 million, to be used for working capital and general corporate
purposes and a committed Term-Loan Facility of $35 million, to be used to fund
acquisitions and provide capital for internal expansion. Additionally, the
Company has obtained a $25 million uncommitted working capital line-of-credit,
for a total available working capital facility of $155 million. The Company is
subject to various restrictive covenants stated in the Credit Agreement. These
covenants, which are typical of those found in loan agreements of that kind,
include restrictions on the incurrence of indebtedness from other sources,
restrictions on advances to or investments in other persons or entities,
restrictions on significant acquisitions, restrictions on the payment of
dividends to shareholders or the repurchase of shares, and the requirement that
various financial ratios be maintained. The Revolving Facility has a one-year
term and is renewable annually.
The Term-Loan Facility has a one-year term with a four-year amortization
beginning after the expiration of the one-year term. Interest on the Revolving
Facility will bear interest at a rate per annum of either (at the Company's
discretion) the prime rate or LIBOR plus 0.75%. The Term-Loan Facility will bear
interest at a rate per annum either (at the Company's discretion) of the prime
rate plus 0.25% or LIBOR plus 1.75%. The LIBOR rate effective at June 30, 2000
was 6.69%. The Company will pay an unused commitment fee on the Revolving
Facility of 0.20% and the Term-Loan Facility of 0.45%. It is the Company's
expectation that the Credit Agreement will continue to be renewed annually.
Debt Maturity Schedule
Scheduled maturities of debt for the years following June 30, 2000, including
the senior secured notes payable, term advances, and notes payable are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30:
<S> <C>
2001........................................ $ 8,395
2002........................................ 8,865
2003........................................ 8,845
2004........................................ 8,625
2005 and thereafter ........................ 1,156
----------
$35,886
==========
</TABLE>
MoneyGram Guarantees and Incentive Bonuses
Existing MoneyGram Services. The Company is an agent for the receipt and
transmission of wire transfers of money through the MoneyGram network. The
Company's agency relationship is currently governed by the 1996 MoneyGram Master
Agreement, as amended (the "Existing MoneyGram Agreement"), with MoneyGram
Payment Systems, Inc. ("MPS"), an affiliate of Travelers Express. The Existing
MoneyGram Agreement expires by its terms on December 31, 2000. The Existing
MoneyGram Agreement provides for a revenue guarantee on acquired stores for the
conversion of wire transfer services to MoneyGram from another supplier. The
amount of the guarantee is equivalent to the annual aggregate wire transfer
revenue for the acquired stores derived from another supplier. The amount of
guarantee revenue, which represents the difference between the guarantee and the
Company's actual wire transfer service revenue from the acquired stores, for the
fiscal years ended June 30, 2000 and 1999, was approximately $2.0 million and
$1.0 million, respectively.
In June 1996, upon the extension of the Existing MoneyGram Agreement to its
current expiration date, the Company received a bonus of $2.0 million. The
Company also receives incentive bonuses under the Existing MoneyGram Agreement
for opening or acquiring new MoneyGram service locations. All of the bonuses
received by the Company under the Existing MoneyGram Agreement have been
<PAGE>
deferred and included in "Other liabilities" in the Company's consolidated
balance sheets and are amortized to revenues over the term of the Existing
MoneyGram Agreement. During the fiscal years ended June 30, 2000 and 1999, $2.6
million and $2.2 million, respectively, of this amortization was recorded and
included in money transfer services revenues. The deferred revenue balance as of
June 30, 2000 and 1999, was $3.7 million and $3.6 million, respectively.
New Money Transfer Agreement. In June 2000, the Company signed a Money Transfer
Agreement with Travelers Express and MPS to become effective upon the expiration
of the Existing MoneyGram Agreement (the "New MoneyGram Agreement"). During the
seven-year term of the New MoneyGram Agreement, the Company will exclusively
offer and sell MoneyGram wire transfer services. Under the New MoneyGram
Agreement (as under the Existing MoneyGram Agreement) the Company will earn
commissions for each transmission and receipt of money through the MoneyGram
network effected at a Company location; those commissions will equal varying
percentages of the fees charged by MPS to consumers for the MoneyGram services.
Under the New MoneyGram Agreement, the Company will also be entitled to receive
a total of approximately $12.5 million in incentive bonuses, payable in equal
monthly installments (without interest) over the seven-year term. The amount of
those monthly installments will be subject to reduction if the Company closes or
sells a significant number of those locations at which MoneyGram services are
offered at the beginning of the New MoneyGram Agreement. In addition, the
Company will be entitled to receive certain incentive payments regarding new
MoneyGram service locations that it opens or acquires during the term of the New
MoneyGram Agreement.
Derivative Instruments and Hedging Activities
To reduce its risk of greater interest expense upon a rise in the prime rate or
LIBOR, the Company has entered into three interest-rate swap agreements with
Bank of America. Those agreements effectively converted a portion of the
Company's floating-rate interest obligations to fixed-rate interest obligations.
With respect to the revolving line-of-credit facility, the first notional amount
is $33 million for a two-year period that began January 4, 1999, and the second
notional amount is $10 million for a sixteen-month period that began September
3, 1999. The third notional amount under the term-loan facility is currently
$9.0 million, with decreases in calendar year 2000. The notional amounts were
determined based on the Company's minimum projected borrowings during calendar
years 1999 and 2000. The fixed rate applicable to the notional amount of $33
million under the revolving line-of-credit facility was 5.14% for calendar year
1999 and is 5.23% for calendar year 2000. The fixed rate applicable to the
notional amount of $10 million under the revolving line-of-credit facility is
6.00% for calendar years 1999 and 2000. The fixed rate applicable to the
notional amount of $9.0 million under the term-loan facility was 6.23% for
calendar year 1999 and is 6.38% for calendar year 2000.
The Company is required to adopt SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," by its first quarter ending September 30,
2000. This standard requires the Company to record the fair value of its
interest-rate swaps as an asset or liability in the consolidated balance sheet.
Changes in the fair value of the interest-rate swaps will be reported as a
component of shareholders' equity in the consolidated balance sheet. The fair
value of the Company's existing interest-rate swaps is $0.6 million as of
June 30, 2000.
5. ACCOUNTS PAYABLE, ACCRUED LIABILITIES, AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
2000 1999
-------------- --------------
(in thousands)
<S> <C> <C>
Accounts payable - trade $ 8,761 $ 4,165
Accrued salaries 2,813 4,268
Deferred revenue - current 3,347 2,881
Money transfer payable 1,454 709
Other 4,867 3,880
-------------- --------------
$21,242 $15,903
============== ==============
</TABLE>
<PAGE>
6. OTHER LIABILITIES - NONCURRENT
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
2000 1999
-------------- --------------
(in thousands)
<S> <C> <C>
Deferred revenue - noncurrent $ 3,459 $ 4,152
Unearned franchise fees and other 60 408
-------------- --------------
$ 3,519 $ 4,560
============== ==============
</TABLE>
7. SHAREHOLDERS' EQUITY
Stock Option Plans
Employee Stock Option Plans. The Company sponsors the 1997 Stock Option Plan (as
amended, the "Plan") for eligible employees. The original employee plan, the
1987 Stock Option Plan, expired during fiscal 1998 (though options granted
thereunder continue to be effective in accordance with their terms), and the
Company adopted the 1997 Stock Option Plan for eligible employees. There are
1,404,079 shares of Common Stock reserved for grants of options under these two
plans. Options are granted at the sole discretion of the Board of Directors,
upon the recommendation of its Compensation Committee, to selected employees of
the Company. Outstanding options are generally exercisable annually in
installments over a three-to-four year period from the date of grant at an
exercise price of not less than the fair market value at the grant date. The
options expire either at five or ten years after date of grant.
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company accounts for stock-based compensation programs using the intrinsic value
method, and accordingly, stock options do not represent compensation expense in
the determination of net income in the consolidated statements of earnings.
Under the intrinsic value method, compensation expense is equal to the excess,
if any, of the quoted market price of the stock at the grant date over the
amount the employee must pay to acquire the stock. Had stock option compensation
expense been determined consistent with the fair value method of measuring
compensation expense under SFAS No. 123, the pro forma effect for fiscal 2000
and 1999 would have been a reduction in the Company's net income of
approximately $0.5 million and $0.3 million, respectively, and a reduction in
diluted earnings per share of approximately $.05 and $.03, respectively.
In determining the pro forma stock compensation expense, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions used for grants in
fiscal 2000 and 1999, respectively: expected volatility of 46% for both years;
expected lives of 4.3 and 4.6 years; risk-free interest rates of 6.1% and 4.7%;
and no expected dividends.
Exercise prices for employee options outstanding as of June 30, 2000, ranged
from $4.11 to 18.00 (fair market value on dates of grant). The following table
provides certain information with respect to stock options outstanding at June
30, 2000:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
REMAINING
RANGE OF EXERCISE PRICES STOCK OPTIONS WEIGHTED-AVERAGE CONTRACTUAL
OUTSTANDING EXERCISE PRICE LIFE
--------------------------------------- ------------- ------------ -------------
<S> <C> <C> <C>
Under $5.40 35,127 $ 4.19 0.4
$5.41 - $7.20 118,020 6.91 1.3
$7.21 - $9.00 48,100 7.37 1.8
$9.01 - $10.80 0 0.0 0.0
$10.81 - $12.60 180,307 12.02 6.9
$12.61 - $14.40 430,006 13.57 8.5
$14.41 - $16.20 74,250 14.92 9.1
$16.21 - $18.00 167,500 17.02 9.5
-------------
1,053,310 $12.58 7.0
=============
</TABLE>
<PAGE>
The following table provides certain information with respect to employee stock
options exercisable at June 30, 2000:
<TABLE>
<CAPTION>
STOCK WEIGHTED-
OPTIONS AVERAGE
RANGE OF EXERCISE PRICES EXERCISABLE EXERCISE PRICE
--------------------------------- -------------- -----------------
<S> <C> <C>
Under $5.40 35,127 $4.19
$5.41 - $7.20 118,020 6.91
$7.21 - $9.00 48,100 7.37
$9.01 - $10.80 0 0.0
$10.81 - $12.60 87,478 11.98
$12.61 - $14.40 50,738 13.33
$14.41 - $16.20 10,311 14.59
$16.21 - $18.00 0 0.0
--------------
349,774 $9.08
==============
</TABLE>
The fair value of options granted during the years ended June 30, 2000 and 1999,
calculated using the Black-Scholes option pricing model, was approximately $6.87
per share and $6.06 per share, respectively.
The following table summarizes stock option activity under the two employees'
stock option plans:
<TABLE>
<CAPTION>
AVAILABLE FOR WEIGHTED
RESERVED OUTSTANDING GRANT AVERAGE PRICE
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Shares at June 30, 1997 1,194,501 749,936 444,565 $ 5.40
Expiration of 1987 stock option plan (504,090) - (504,090) -
1997 stock option plan 900,000 - 900,000 -
Exercised (195,549) (195,549) - 4.88
Canceled - (85,425) 85,425 7.14
Granted - 248,707 (248,707) 12.29
-------------- -------------- ---------------
Shares at June 30, 1998 1,394,862 717,669 677,193 7.73
Exercised (173,367) (173,367) - 4.54
Canceled (17,206) (78,419) 61,213 11.68
Granted - 331,105 (331,105) 13.49
-------------- -------------- ---------------
Shares at June 30, 1999 1,204,289 796,988 407,301 10.42
Increase in shares reserved for options 315,000 - 315,000 -
Exercised (110,435) (110,435) - 6.65
Canceled (4,775) (102,729) 97,954 13.46
Granted - 469,486 (469,486) 15.07
-------------- -------------- ---------------
Shares at June 30, 2000 1,404,079 1,053,310 350,769 $12.58
============== ============== ===============
</TABLE>
Non-employee Director Stock Option Plan. In 1995, the Board of Directors and the
shareholders of the Company approved the adoption of a nonqualified non-employee
director stock option plan. The purpose of this plan is to permit the Company to
grant options to the Company's outside directors as part of their compensation.
The plan originally had 135,000 shares reserved for issuance and in November
1998, an amendment was approved to increase the number of shares to 260,000.
Options as to 136,750 shares have been granted under the plan at a weighted
average exercise price of $9.53 per share. During the fiscal year ended June 30,
2000, no shares were exercised and none were canceled. Had stock option
compensation expense been determined consistent with the fair value method of
measuring compensation expense under SFAS No. 123, the pro forma effect for
fiscal 2000 and 1999 would have been a reduction in the Company's net income of
approximately $32,000 and $25,000, respectively, and with no impact on diluted
earnings per share for either year.
<PAGE>
In determining the pro forma stock compensation expense, the fair value of each
non-employee director option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal 2000 and 1999, respectively: expected
volatility of 46% for both years; expected lives of 4.9 and 4.8 years; risk-free
interest rates of 6.1% and 4.7%; and no expected dividends.
Exercise prices for non-employee director options outstanding as of June 30,
2000, ranged from $4.11 to $16.38 (fair market value on dates of grant). The
following table provides certain information with respect to stock options
outstanding at June 30, 2000:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
REMAINING
RANGE OF EXERCISE PRICES STOCK OPTIONS WEIGHTED-AVERAGE CONTRACTUAL
OUTSTANDING EXERCISE PRICE LIFE
----------------------------------- ------------- ---------- -----------
<S> <C> <C> <C>
Under $5.40 15,750 $ 4.11 0.4
$5.41 - $7.20 36,000 6.55 1.3
$7.21 - $9.00 0 0.0 0.0
$9.01 - $10.80 0 0.0 0.0
$10.81 - $12.60 27,000 12.42 2.4
$12.61 - $14.40 20,000 13.25 3.4
$14.41 - $16.20 0 0.0 0.0
$16.21 - $18.00 20,000 16.38 4.4
--------------
118,750 $10.35 2.3
==============
</TABLE>
The following table provides certain information with respect to non-employee
director stock options exercisable at June 30, 2000:
<TABLE>
<CAPTION>
STOCK OPTIONS WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES EXERCISABLE EXERCISE PRICE
-------------------------------- -------------- -----------------
<S> <C> <C>
Under $5.40 15,750 $4.11
$5.41 - $7.20 36,000 6.55
$7.21 - $9.00 0 0.0
$9.01 - $10.80 0 0.0
$10.81 - $12.60 18,000 12.42
$12.61 - $14.40 6,664 13.25
$14.41 - $16.20 0 0.0
$16.21 - $18.00 0 0.0
--------------
76,414 $8.01
==============
</TABLE>
The fair value of options granted during the years ended June 30, 2000 and 1999,
calculated using the Black-Scholes option pricing model, was approximately $7.90
per share and $6.09 per share, respectively.
Stock Repurchase Program
In August 1999, the Company's Board of Directors authorized the repurchase from
time to time of up to approximately $4 million of the Company's Common Stock in
the open market or in negotiated transactions. In August 2000, the Company's
Board of Directors authorized the repurchase of an additional $1 million of the
Company's Common Stock. This stock repurchase program will remain in effect
unless discontinued by the Board of Directors. As of June 30, 2000, the Company
had repurchased 181,400 shares at an average price of $13.25 per share.
<PAGE>
8. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------
2000 1999 1998
-------------- -------------- -----------
(in thousands)
<S> <C> <C> <C>
Federal income tax $4,212 $4,274 $4,083
State income tax 861 898 851
-------------- -------------- -----------
5,073 5,172 4,934
Deferred 322 218 (749)
-------------- -------------- -----------
$5,395 $5,390 $4,185
============== ============== ===========
</TABLE>
The net deferred tax asset consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------
2000 1999
------------------ ------------------
(in thousands)
<S> <C> <C>
Gross assets $3,547 $3,913
Gross liabilities (2,461) (1,745)
------------------ ------------------
Net deferred tax asset $1,086 $2,168
================== ==================
</TABLE>
The tax effect of significant temporary differences representing deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------
2000 1999
------------------ ------------------
(in thousands)
<S> <C> <C>
Accrued liabilities and other $976 $488
Deferred revenue 2,571 2,588
Depreciation and amortization (2,461) (908)
------------------ ------------------
$1,086 $2,168
================== ==================
</TABLE>
The provisions for taxes on income as reported differ from the tax provision
computed by applying the statutory federal income tax rate of 34% as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
2000 1999 1998
----------- ---------- -----------
(in thousands)
<S> <C> <C> <C>
Federal income tax provision on income at
statutory rate of 34% $4,644 $4,638 $3,600
State taxes, net of federal benefit 611 702 562
Amortization of excess purchase price over
fair value of assets acquired 109 84 84
Other-net 31 (34) (61)
----------- ---------- -----------
Income tax provision $5,395 $5,390 $4,185
=========== ========== ===========
</TABLE>
<PAGE>
9. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under non-cancelable
operating leases. Most of the Company's facility leases contain options that
allow the Company to renew leases for periods that generally range from three to
nine years. At June 30, 2000, future minimum rental payments under existing
leases were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30:
<S> <C>
2001................................................... $14,274
2002................................................... 10,167
2003................................................... 6,641
2004................................................... 3,262
2005 and thereafter ................................... 1,355
----------
$35,699
==========
</TABLE>
Rent expense was approximately $14.9 million, $12.9 million, and $10.7 million
for the years ended June 30, 2000, 1999, and 1998, respectively.
The Company has entered into an agreement to settle the lawsuit against the
Company in Arkansas, Angie Gwatney v. Ace Cash Express, Inc. Under the
settlement, qualified customers will receive certificates that may be redeemed
for prepaid telephone cards from the Company. The face amount of the telephone
cards will equal 75% of the total amount of fees ($2.2 million) that the
customers paid the Company in deferred-presentment transactions from February 9,
1996 through June 15, 1999. It is impossible to predict the number and face
amount of the telephone cards that the Company will have to provide to
customers. But, based on its estimate of the distribution of those cards, the
Company has provided in its financial statements a total of $640,000 to satisfy
its settlement obligations. The settlement agreement has been approved by the
court, and the Company believes that the approval will be final and effective on
October 5, 2000. The Company is involved in various other legal proceedings
incidental to the conduct of its business. Management believes that these legal
proceedings will not result in any material impact on the Company's financial
condition and results of operations.
10. EMPLOYEE BENEFITS PLANS
The Company has established a 401(k) savings plan on behalf of its employees.
Employees may contribute up to 20% of their annual compensation to the plan,
subject to statutory maximums. The Board of Directors has authorized a 25%
matching of employee contributions made to the plan beginning January 1999. The
Company's matching contributions were approximately $217,000 and $79,000 for the
years ended June 30, 2000 and 1999, respectively.
11. RELATED PARTY TRANSACTIONS
In March and April 2000, the Company invested a total of $1 million in ePacific
Incorporated ("ePacific"), a private company in the business of providing
customized debit-card payment systems and electronic funds transfer processing
services, which has been recorded under the cost method and is included in other
assets on the consolidated balance sheet. ePacific, formerly a controlled
subsidiary of Goleta, provides the debit-card system and processing services to
Goleta to enable it to make the Bank Loans described above in Summary of
Significant Accounting Policies - Loans Receivable.
The Company's investment in ePacific was made at the same times, and on the same
terms, as the investment by two venture capital investors. The Company purchased
approximately 14% of the shares of ePacific's Series A Convertible Preferred
Stock purchased by the group of investors. The terms of those shares are typical
of preferred stock issued and purchased in venture capital investments, and
include the right to periodic dividends from ePacific, the right to a
preferential distribution upon liquidation of ePacific, voting rights with
ePacific common stock, and the right to convert the preferred stock into
ePacific common stock. Under a stockholders' agreement with ePacific and its
other stockholders, the Company agreed to certain restrictions on transfer of
its ePacific stock, received certain securities registration rights regarding
resale of its ePacific stock, and received the right to designate one person to
serve as a director of ePacific. The Company designated Jay Shipowitz, its
President and Chief Operating Officer, to serve as a director of ePacific.
Management believes the transactions with ePacific are at arms length and are
under terms no more or less favorable to the Company than those with other
vendors.
<PAGE>
12. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the fiscal years ended June 30, 2000,
1999, and 1998, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------- YEAR ENDED
SEPT 30 DEC 31 MAR 31 JUNE 30 JUNE 30
----------- ------------ ------------- --------------- ----------------
(in thousands, except per share amounts)
2000:
<S> <C> <C> <C> <C> <C>
Revenues $30,588 $32,284 $41,337 $36,427 $140,636
Income before cumulative effect
of accounting change 1,022 1,403 5,177 1,264 8,866
Diluted earnings per share before
cumulative effect of accounting
change .10 .14 .51 .11 .86
Net income 419 1,403 5,177 1,264 8,263
Diluted earnings per share .04 .14 .51 .11 .80
1999:
Revenues $26,023 $28,656 $36,009 $31,626 $122,314
Net income 796 1,116 4,095 2,243 8,250
Diluted earnings per share .08 .11 .40 .22 .80
1998:
Revenues $21,694 $23,125 $29,340 $26,035 $100,194
Net income 610 824 3,148 1,820 6,402
Diluted earnings per share .06 .08 .31 .18 .63
</TABLE>
The Company's business is seasonal because of the impact of cashing tax refund
checks and two other tax-related services -- electronic tax filings and
processing applications for refund anticipation loans. The impact of these
services is in the third and fourth quarter of the Company's fiscal year.
