| ACE CASH EXPRESS INC/TX ITEM 1A RISK FACTORS Our current business and future results may be affected by a number of risks and uncertainties, including those described below |
| The risks and uncertainties described below are not the only risks and uncertainties we face |
| Additional risks and uncertainties not currently known to us or that we currently deem immaterial also may impair our business operations |
| If any of the following risks actually occur, our business, results of operations and financial condition could suffer |
| The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements |
| Our significant indebtedness and the restrictive covenants under our debt agreements may limit our ability to expand or pursue our business strategy |
| In addition, if we are forced to repay some or all of this debt following an event of default, our financial condition and results of operations would be severely and adversely affected |
| Our business requires significant amounts of cash for services and inventory |
| Therefore, we have, and we expect to have, a significant amount of outstanding debt and may incur additional debt in the future as we seek to expand our business |
| As of June 30, 2006, our short-term debt was dlra77dtta3 million, and our non-current acquisition notes payable totaled dlra19dtta4 million |
| Our debt agreements require us to maintain compliance with numerous financial covenants |
| The covenants restrict our ability to take certain actions to some extent, including our ability to: • incur additional indebtedness; • pay dividends and make distributions in respect of our capital stock; • create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions to us; • repurchase our capital stock; • make investments, loans or other restricted payments; • engage in transactions with shareholders and affiliates; • create or permit certain liens; • use the proceeds from sales of assets and subsidiary stock; • sell or otherwise dispose of assets; • make payments on our debt, other than in the ordinary course; and • engage in mergers and acquisitions |
| Any restrictions on our ability to borrow additional funds under our revolving credit facility would have a material adverse effect on our ability to operate our business because we require frequent advances to provide cash to our stores to dispense to our customers |
| As long as our indebtedness remains outstanding, the restrictive covenants could impair our ability to expand or pursue our growth strategy |
| In addition, the breach of any covenants or any payment obligations in any of these debt agreements will result in an event of default under the applicable debt instrument |
| If there were an event of default under one of our debt agreements, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable, subject to applicable grace periods |
| This could trigger cross-defaults under our other debt agreements |
| We cannot assure you that our assets or cash flow would be sufficient to repay fully borrowings under our outstanding debt agreements if accelerated upon an event of default or cross-default, or that we would be able to refinance or restructure the payments on any of those debt agreements |
| Further, if we were unable to repay, refinance or restructure our indebtedness under our secured debt agreements, the lenders under such agreements could proceed against the collateral securing that indebtedness |
| Substantially all of our assets are pledged to secure the outstanding indebtedness |
| Forced repayment of some or all of our 24 _________________________________________________________________ [79]Table of Contents indebtedness would reduce our available cash and have an adverse impact on our financial condition and results of operations |
| In addition to our high level of indebtedness, we have significant fixed and contingent rental obligations with respect to our stores leases |
| For the year ended June 30, 2006, our aggregate rental payments for these leases, including taxes and operating expenses, was approximately dlra28dtta3 million |
| These obligations could further increase the risks described above |
| Our existing and future debt obligations could adversely affect our business, results of operations and financial condition |
| Our significant amount of debt could have important consequences |
| For example, it could: • make it more difficult for us to satisfy our obligations to the holders of our outstanding debt; • make us vulnerable to interest rate increases, because a significant portion of our borrowings is, and will continue to be, at variable rates of interest; • require us to dedicate a substantial portion of our cash flow from operations to payments on our debt obligations, which will reduce our funds available for working capital, capital expenditures and other general corporate expenses; • limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; • place us at a disadvantage compared to our competitors that have proportionately less debt; • restrict our operational flexibility, because of restrictive covenants that will limit our ability to make acquisitions, explore certain business opportunities, dispose of assets and take other actions; and • limit our ability to borrow additional funds in the future, if we need them, due to applicable financial and restrictive covenants in our debt agreements |
| If our debt levels increase, the related risks that we face will also increase |
| If we fail to generate sufficient cash flow to service our debt, we may be required to: • refinance all or a portion of our debt; • obtain additional financing; • sell some of our assets or operations; • reduce or delay capital expenditures and/or acquisitions; or • revise or delay our strategic plans |
| If we are required to take any of these actions, it could have a material adverse effect on our business, results of operations, and financial condition |
| In addition, we cannot assure you that we would be able to take any of these actions, that these actions would enable us to continue to satisfy our capital requirements or that these actions would be permitted under the terms of our various debt instruments |
| If we do not generate a sufficient amount of cash, which depends on many factors beyond our control, our liquidity and our ability to service our indebtedness and fund our operations would be harmed |
| Based on our current level of operations and anticipated revenue growth, we believe our cash flow from operations, available cash and available borrowings under our credit facilities will be adequate to meet our future liquidity needs |
| However, we have substantial working capital needs, contractual commitments and debt service obligations |
| We cannot assure you that our business will generate sufficient cash flow from operations, that our anticipated revenue growth will be realized or that future borrowings will be available to us under credit facilities in amounts sufficient to enable us to pay our existing indebtedness or fund our other liquidity needs |
| In addition, if we undertake expansion efforts in the future, our cash requirements may increase significantly |
| 25 _________________________________________________________________ [80]Table of Contents The industry in which we operate is strictly regulated at both the federal and state level |
| Changes in current laws and regulations, or the application of future laws and regulations, may have a significant negative impact on our business, results of operations and financial condition |
| Our business is subject to numerous state and certain federal laws and regulations which are subject to change and which may impose significant costs or limitations on the way we conduct or expand our business |
| These regulations govern or affect, among other things: • check cashing fees; • licensing and posting of fees; • lending practices, such as truth in lending; • interest rates and usury; • currency reporting; • recording and reporting of certain financial transactions; • franchising in the states in which we offer and sell franchises; • privacy of personal consumer information; and • prompt remittance of proceeds for the sale of money orders |
| As we develop new services, we may become subject to additional federal and state regulations |
| States may also seek to impose new licensing requirements or interpret or enforce existing requirements in new ways |
| In addition, changes in current laws and future laws or regulations may restrict our ability to continue our current methods of operation or expand our operations |
| For example, as a result of the revised FDIC guidelines issued in March 2005 regarding short-term consumer loans, which are more fully described below, we ceased offering loans made by Republic Bank & Trust Company, a Kentucky state-chartered bank, and First Bank of Delaware, a Delaware state-chartered bank, in our Texas stores as of the end of February 2006, and ceased offering loans made by Republic Bank in our Arkansas and Pennsylvania stores as of the end of June 2006 |
| Changes in laws or regulations may have a material adverse effect on our business, results of operations and financial condition |
| If we fail to observe applicable legal requirements, we may be forced to discontinue certain product service offerings, which could negatively impact our business |
| In addition, violation of these laws and regulations could result in fines and other civil and/or criminal penalties |
| For example, many state usury laws require that parties who charge interest in excess of the usury rates pay a penalty equal to the principal of the loan made and a multiple of the finance charge assessed |
| Depending on the nature and scope of a violation, fines and other penalties for non-compliance of applicable requirements could be significant and could have a material adverse affect on our results of operation and financial condition |
| Short-term consumer loan services have come under increased scrutiny and regulation |
| If the restrictions created by such regulations increase, or if short-term consumer loans become prohibited in the states where we offer these loans, our business would be materially adversely affected |
| A significant portion of our revenues is based on loan interest and fees from short-term consumer loans that we offer in our company-owned stores |
| Short-term consumer loans have come under increased scrutiny and regulation in recent years |
| Legislation has been introduced in congress and in certain state legislatures, and regulatory authorities have proposed or publicly addressed the possibility of proposing regulations, that may prohibit or severely restrict short-term consumer loans |
| For example, in December 2002, we ceased offering short-term consumer loans at our stores in Alabama, Georgia and North Carolina as a result of laws enacted restricting short-term consumer loans in those states |
| As a result of more recently enacted laws in Alabama permitting short-term consumer loans, we resumed offering short-term consumer loans at our company-owned store in that state in July 2004 |
| More recently, the Georgia state legislature passed a law in April 2004, banning short-term consumer loans in that state |
| We intend to continue, with others in the short-term consumer loan industry, to inform and educate legislators and to oppose legislative or regulatory action that may prohibit or severely restrict short-term consumer loans |
| Nevertheless, if legislative or regulatory action with that effect were taken on the federal level or in states in which we have a significant number of stores, that action may have a material adverse effect on our loan-related activities and revenues |
| Moreover, similar action by states in which we are not currently offering short-term consumer loans could result in us having fewer opportunities to pursue our growth strategy |
| 26 _________________________________________________________________ [81]Table of Contents In 2002, the Office of the Comptroller of the Currency, which supervises national banks, took action to effectively prohibit certain national banks from offering and making short-term consumer loans because of the agency’s view that they posed various risks to those banks |
| As a result, we discontinued offering Goleta National Bank loans in our stores on December 31, 2002 |
| In addition, we act or have acted as marketer and servicer of loans for Republic Bank and First Bank of Delaware, and they are subject to federal and state banking regulations |
| The States of Kentucky and Delaware are the primary regulators for Republic Bank and First Bank of Delaware, respectively, and the Federal Deposit Insurance Corporation, or FDIC also regulates each bank |
| The FDIC issued guidelines governing permissible arrangements between a state-chartered bank and a marketer and servicer of its short-term loans in July 2003, and issued revised guidelines in March 2005 |
| The guidelines apply to our marketing and servicing agreements with Republic Bank, for which we formerly marketed and serviced a shorter-term (14-day), single-installment loan, and First Bank of Delaware, for which we market and service a longer-term (currently 20-week), multi-installment loan, regarding the offering of each such bank’s loans at our stores in Arkansas, Pennsylvania and Texas |
| The guidelines describe the FDIC’s expectations for a bank’s prudent risk-management practices regarding short-term consumer loan marketing and servicing relationships |
| They address bank capital requirements, allowances for loan losses and loan classifications as well as income recognition, collection-recovery practices and compliance with consumer protection laws when a bank engages in short-term consumer lending |
| The revised FDIC guidelines issued in March 2005 include a requirement that banks (such as Republic Bank and First Bank of Delaware) develop procedures to ensure that a short-term consumer loan is not provided to any customer that has received such loans from any lender for more than three months in the previous 12 months |
| The revised FDIC guidelines also suggest that supervised lenders should offer a customer subject to such a limitation, or refer such a customer to, a longer-term loan product |
| Pursuant to agreements we entered into with each of Republic Bank and First Bank of Delaware in February 2006, we ceased offering loans made by Republic Bank and First Bank of Delaware in our Texas stores at the end of February 2006 |
| For the first six months of 2006, such loans accounted for approximately 10prca of our revenues |
| Pursuant to our agreement with Republic Bank, we also ceased offering loans made by Republic Bank in our Arkansas and Pennsylvania stores at the end of June 2006 and no longer offer loans by Republic Bank at any of our stores |
| It is unclear at this time what procedures and/or alternate products the FDIC may accept as conforming with the revised guidelines |
| In particular, the installment loan product that we offer with First Bank of Delaware has only been available since August 2005 and there remains some level of uncertainty regarding the extent to which we can continue to offer loans made by First Bank of Delaware in our Arkansas and Pennsylvania stores |
| If the implementation and enforcement of the revised FDIC guidelines or any newly promulgated guidelines by the FDIC, or any order, law, rule or regulation by the State of Delaware or the FDIC, were to have the effect of significantly curtailing First Bank of Delaware’s installment lending services, our revenues derived from fees from First Bank of Delaware would be materially adversely affected, unless we could offer, or we could secure an agreement with another financial institution not subject to such limitations to offer, similar or alternate services |
| We cannot assure you that we would be successful in offering similar or alternate services or finding such a replacement financial institution, in the latter case especially because arrangements like ours with First Bank of Delaware are coming under increasing political and regulatory scrutiny |
| Lawsuits filed against banks offering short-term consumer loans, such as one filed by the New York State Attorney General’s office in September 2003 discussed below, may hinder our ability to partner with a replacement financial institution or to establish relationships with new financial institutions in other states as part of our growth strategy |
| Any alternate or similar services or agreement with a replacement or new financial institution may also not be on terms as favorable to us as our current agreement with First Bank of Delaware |
| Republic Bank and First Bank of Delaware are also subject to FDIC inspection and authority, and as a result of our marketing and servicing activities, we too are subject to such inspection and authority |
| We cannot assure you that the regulatory scheme affecting Republic Bank or First Bank of Delaware, or FDIC inspection or authority with respect to Republic Bank, First Bank of Delaware or us, will not negatively impact our operations |
| Any order, rule or regulation of the State of Texas curtailing the amount or manner in which True Financial Services offers CSO loans in our Texas stores could materially adversely affect our revenues derived from offering credit services |
| In March 2006, our subsidiary, ACE Credit Services, LLC, a credit services organization registered under Chapter 393 of the Texas Finance Code, commenced offering credit services to prospective borrowers in our Texas stores |
| For the fourth quarter of 2006, such loans accounted for approximately 13prca of our revenue |
| These credit services include arranging for a short-term loan from an independent third-party lender, True Financial Services, LP, and, if the customer is approved for and accepts the loan, we provide a letter of credit to True Financial to secure the customer’s payment obligations in the event of a default by them, for which we receive a fee payable by the borrowing customer |
| This is a novel product and, as a result, there 27 _________________________________________________________________ [82]Table of Contents remains uncertainty regarding the future actions of regulators with respect to this product |
| If any order, law, rule or regulation by the State of Texas were to have the effect of significantly curtailing the amount or manner in which ACE Credit Services’ may assess fees for the credit services it offers, our revenues derived from offering credit services would be materially adversely affected, unless we could offer, or we could secure an agreement with another party not subject to such limitations to offer, similar or alternate services |
| A significant portion of our revenue is generated by our stores in Texas and a limited number of states |
| Approximately 30prca of our stores are located in Texas and accounted for approximately 30prca of our revenue in 2006 in the aggregate |
| As a result, if any of the events noted in these risk factors were to occur at our stores in these states, including changes in the regulatory environment, it could significantly reduce our revenue and cash flow and materially adversely affect us |
| Potential litigation and regulatory proceedings regarding our consumer loans could materially adversely affect our financial condition |
| During the last few years, we and our competitors have been subject to regulatory proceedings, class action lawsuits and other litigation regarding the offering of consumer loans, particularly those with a shorter-term |
| In our case, such litigation and regulatory proceedings historically primarily involved attempts by plaintiffs to recharacterize us as the true lender of short-term consumer loans made by Goleta National Bank through our stores, in part because we acquired participations in the Goleta loans |
| Although our relationship with Goleta has been terminated and we have settled the related class action lawsuit, we cannot assure you that we will not be subject to future lawsuits associated with our consumer loan services |
| In particular, we may become subject to litigation or regulatory proceedings focusing on our relationship with any of Republic Bank, First Bank of Delaware or True Financial |
| If we were to be recharacterized as the lender of the Republic Bank loans, the First Bank of Delaware loans or the CSO loans, then the interest charged for these loans would violate most of the applicable states’ usury laws which impose maximum rates of interest or finance charges that a non-bank lender may charge, and any resulting refunds or penalties we would likely incur would materially adversely affect our results of operations and financial condition |
| While there are differences between the Goleta loans and each of the Republic Bank loans, First Bank of Delaware loans and the CSO loans, principally that we do not acquire participations in any such loans, and while we believe we are not the lender under any of our arrangements with Republic Bank, First Bank of Delaware or True Financial, we cannot assure you that a regulator or a borrower will not try to recharacterize us as the true lender |
| For example, although we do not offer short-term consumer loans in New York, in September 2003 the New York State Attorney General’s office filed a lawsuit against a Delaware state-chartered bank and the companies servicing its short-term consumer loans through a structure that is in some respects similar to our agreements with Republic Bank, First Bank of Delaware and True Financial |
| Media reports and public perception of short-term consumer loans as being predatory or abusive could materially adversely affect our business |
| Over the past few years, consumer advocacy groups and certain media reports have advocated governmental action to prohibit or severely restrict consumer loans, particularly those with a shorter-term |
| The consumer groups and media reports typically focus on the cost to a consumer for this type of 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 loan, but renews, or rolls over, that loan for one or more additional short-term periods |
| The consumer groups and media reports typically characterize these short-term consumer loans as predatory or abusive toward consumers |
| If this negative characterization of our short-term consumer loan service becomes increasingly accepted by consumers, demand for our short-term consumer loans could significantly decrease, which could materially adversely affect our results of operations and financial condition |
| Negative perception of our short-term consumer loans or other activities could also result in us being subject to more restrictive laws and regulations |
| For example, the Georgia state legislature passed a short-term consumer loan prohibition law in April 2004 |
| In addition, we may become subject to lawsuits against us for loans we make or have made, or loans we service or have serviced, for any of Republic Bank, First Bank of Delaware or True Financial |
| If changes in the laws affecting any of our short-term consumer loans, the Republic Bank loans, the First Bank of Delaware loans or the CSO loans are enacted, or if we become subject to such lawsuits, our financial condition and results of operations would be materially adversely affected |
| 28 _________________________________________________________________ [83]Table of Contents If our estimates of our loan losses are not adequate to absorb known or probable losses, our financial condition may be materially adversely affected |
| We maintain an allowance for loan losses at levels to cover the anticipated losses in the collection of the portfolio of loans that we make |
| We determine our allowance for loan losses based upon a review of historical loan losses and the loan portfolio |
| Our allowance for loan losses is periodically reviewed by our management |
| For the year ended June 30, 2006, our loan loss provision was dlra23dtta3 million, and we charged-off dlra21dtta2 million related to our loans |
| Our loan loss provision, however, is an estimate, and if actual loan losses are materially greater than our loan loss provision or our loan losses increase, our financial condition could be materially adversely affected |
| With respect to the Republic Bank loans and First Bank of Delaware loans, we are obligated to reimburse each bank for all loan losses |
| With respect to the CSO loans, we are obligated to reimburse the lender for the principal, interest and a portion of any insufficient funds fees assessed by the lender |
| As a result, we could be potentially obligated to pay each of Republic Bank, First Bank of Delaware and True Financial for loan losses in an amount up to the total outstanding amount of loans made by each such lender as recorded on their respective financial statements, and for True Financial, also liable for a portion of any insufficient funds fees assessed by the lender |
| We commenced offering First Bank of Delaware loans on August 1, 2005 and CSO loans on March 1, 2006 |
| We ceased offering Republic Bank loans and First Bank of Delaware loans in our Texas stores as of the end of February 2006, and ceased offering Republic Bank loans in our Arkansas and Pennsylvania stores as of the end of June 2006 |
| As of June 30, 2006, Republic Bank’s financial statements reflect a total outstanding amount of dlra0dtta5 million for Republic Bank loans, First Bank of Delaware’s financial statements reflect a total outstanding amount of dlra1dtta1 million for First Bank of Delaware loans, and True Financial’s financial statements reflect a total outstanding amount of dlra12dtta0 million for the CSO loans |
| These amounts are not included on our balance sheet |
| For the year ended June 30, 2006, we incurred an expense of approximately dlra5dtta8 million to provide for losses on Republic Bank loans and charged-off dlra9dtta1 million related to Republic Bank loans, incurred an expense of approximately dlra2dtta8 million to provide for losses on First Bank of Delaware loans and charged-off dlra1dtta2 million related to First Bank of Delaware loans, and incurred an expense of dlra2dtta7 million to provide for losses on CSO loans, with no amounts charged off as of June 30, 2006 |
| The balance of the liability for Republic Bank loan losses reported in accrued liabilities as of June 30, 2006 was dlra0dtta8 million |
| The balance of the liability for First Bank of Delaware loan losses reported in accrued liabilities as of June 30, 2006 was dlra1dtta6 million |
| The balance of the liability for CSO loan losses reported in accrued liabilities as of June 30, 2006 was dlra2dtta7 million |
| The liabilities for loan losses to Republic Bank, First Bank of Delaware and True Financial are however, estimates |
| If actual loan losses are materially greater than our recorded amount payable to either of these banks or True Financial, our financial condition could be materially adversely affected |
| A significant portion of our consumer lending business is derived from our relationships with third-party lenders, and a loss of any of these relationships could adversely affect our business |
| We provide various services to third-party lenders in connection with loans they make in some of our stores |
| In the case of the Republic Bank loans and the First Bank of Delaware loans, we are paid a fee by the banks for our marketing and servicing of these bank loans |
| In the case of the CSO loans, we are paid a fee by the borrowing customer to assist them in obtaining the CSO loan |
| Approximately 7prca of our total revenues in the year ended June 30, 2006 was derived from marketing and servicing fees paid to us by Republic Bank and First Bank of Delaware, but we expect this percentage of total revenues to decline because we ceased offering Republic Bank loans and First Bank of Delaware loans in our Texas stores as of the end of February 2006 and ceased offering Republic Bank loans in our Arkansas and Pennsylvania stores as of the end of June 2006 |
| Approximately 13prca of our total revenues in the quarter ended June 30, 2006 (the first full quarter after we introduced the CSO loan product) was derived from providing credit services for customers seeking CSO loans made by True Financial in 384 of our Texas stores, which we began offering on March 1, 2006 |
| If a termination of or significant adverse change in our relationship with either True Financial or First Bank of Delaware were to occur, the revenues we derive from providing credit services for the customers seeking CSO loans or from marketing and servicing the First Bank of Delaware loans would decline unless we were able to find a replacement relationship with a new financial institution to offer the same or similar services |
| We cannot assure you that we would be able to secure a new relationship with a financial institution or that the terms of any such new relationship would be as favorable to us as those of our existing relationship with True Financial or First Bank of Delaware |
| As a result, any significant changes in our relationship with True Financial or First Bank of Delaware could lead to such third-party lenders ceasing the making of their loans in our stores or change the way we conduct business in certain states, either of which could materially adversely affect our results of operations |
| 29 _________________________________________________________________ [84]Table of Contents If the loan approval process for either First Bank of Delaware or True Financial is flawed and more loans go uncollected, our results of operations could be materially adversely affected |
| Our agreement with First Bank of Delaware provides for us to market and service loans offered by them at our company-owned stores in Arkansas, Pennsylvania and California |
| Our agreement with True Financial provides for us to provide credit services to borrowers at our company-owned stores in Texas, which credit services include arranging for loans from True Financial and issuing on the borrower’s behalf a letter of credit to True Financial securing the principal, interest and a portion of any insufficient funds fee assessed by True Financial |
| Each lender is responsible for reviewing each respective loan application and determining whether such application is approved for a loan |
| We are not involved in the loan approval process, including with respect to determining the loan approval procedures or criteria |
| However, under each of our agreements with First Bank of Delaware and True Financial, we are required to reimburse the lender for loan losses and, in the case of True Financial, a portion of any insufficient funds fee assessed by True Financial |
| If any lender’s loan approval process is flawed and an increased number of loans that are made are uncollected, our results of operations could be materially adversely affected |
| We have ceased offering loans made by Republic Bank at any of our stores as of the end of June 2006 |
| We are subject to franchise law and regulations that govern our status as a franchisor and regulate some aspects of our franchise relationships |
| Our ability to develop new franchised stores and to enforce contractual rights against franchisees may be adversely affected by these laws and regulations, which could cause our franchise revenues to decline and adversely affect our growth strategy |
| We are subject to federal and state laws and regulations, including the regulations of the Federal Trade Commission as well as similar authorities in individual states, in connection with the offer, sale and termination of franchises and the regulation of the franchisor-franchisee relationship |
| Our failure to comply with these laws could subject us to liability to franchisees and to fines or other penalties imposed by governmental authorities |
| In addition, we may become subject to litigation with, or other claims filed with state or federal authorities by, franchisees based on alleged unfair trade practices, implied covenants of good faith and fair dealing, payment of royalties, location of stores, advertising expenditures, franchise renewal criteria or express violations of franchise agreements |
| We cannot assure you that we will not encounter compliance problems from time to time or that material disputes will not arise with one or more franchisees |
| Accordingly, our failure to comply with applicable franchise laws and regulations, or disputes with franchisees, could have a material adverse effect on our results of operations financial condition and growth strategy |
| Our current and future business growth strategy involves new store openings and acquisitions, and our failure to manage our growth or integrate or manage new stores we open or acquire may adversely affect our business, prospects, results of operations and financial condition |
| Our expansion strategy consists principally of combining new store openings (both company-owned and franchised stores) and acquisitions and increasing comparable store sales of existing services |
| New store openings and acquisitions may impose costs on us and subject us to numerous risks, including: § identification of new locations and negotiation of acceptable lease terms; § assimilation of acquired operations or services, including the loss of key employees from acquired businesses; § diversion of management’s attention from our core business; § dilutive issuances of our equity securities (if necessary to finance acquisitions or new stores); § incurrence of additional indebtedness (if necessary to finance acquisitions or new stores); § assumption of contingent liabilities; § the potential impairment of acquired assets; and § incurrence of significant immediate write-offs |
| Our continued growth is dependent upon a number of factors, including the availability of adequate financing and suitable store locations, acquisition opportunities and experienced management employees, the ability to obtain any required government permits and licenses and other factors, some of which are beyond our control |
| We cannot assure you that we will be able to expand our business successfully through new store openings and acquisitions |
| Our failure to expand, 30 _________________________________________________________________ [85]Table of Contents manage or complete the integration of any new stores or acquired business could have a material adverse effect on our business, prospects, results of operations and financial condition |
| If we lose key management or are unable to attract and retain the talent required for our business, our operating results and growth could suffer |
| Our future success depends to a significant degree upon the members of our senior management, particularly Jay Shipowitz, our President and Chief Executive Officer |
| Shipowitz or other members of senior management could harm our business and development |
| Our continued growth also will depend upon our ability to attract and retain additional skilled management personnel |
| If we are unable to attract and retain personnel as needed in the future, our operating results and growth could suffer |
| We are dependent on hiring an adequate number of hourly employees to run our business and are subject to government regulations concerning these and our other employees, including minimum wage laws |
| Our workforce is comprised primarily of employees who work on an hourly basis |
| In certain areas where we operate, there is significant competition for employees |
| The lack of availability of an adequate number of hourly employees or increase in wages and benefits to current employees could adversely affect our operations |
| We are subject to applicable rules and regulations relating to our relationship with our employees, including minimum wage and break requirements, health benefits, unemployment and sales taxes, overtime and working conditions and immigration status |
| Accordingly, legislated increases in the federal minimum wage, as well as increases in additional labor cost components, such as employee benefit costs, workers’ compensation insurance rates, compliance costs and fines would increase our labor costs, which could have a material adverse effect on our business |
| Competition in the retail financial services industry is intense and could cause us to lose market share and revenues |
| The industry in which we operate is highly fragmented and very competitive |
| In addition, we believe that the market will become more competitive as the industry matures and consolidates |
| We compete with other check cashing stores, short-term consumer lenders, mass merchandisers, grocery stores, banks, savings and loan institutions, other financial services entities and other retail businesses that also cash checks, offer short-term consumer loans, sell money orders, provide money transfer services, or other similar financial services |
| Some of our competitors that are not check cashing companies have larger and more established customer bases and substantially greater financial, marketing and other resources |
| Our stores also face competition from automated check cashing machines deployed in supermarkets, convenience stores and other public venues by large financial services organizations |
| We cannot assure you that we will be able to compete successfully |
| As a result, we could lose market share and our revenues could decline, thereby affecting our ability to generate sufficient cash flow to service our indebtedness and fund our operations |
| Our revenues and net income from check cashing services may be materially adversely affected if the number of consumer check cashing transactions decreases as a result of technological development or the amount of checks we cash that are uncollected significantly increases |
| For the year ended June 30, 2006, approximately half of our revenues were generated by our check cashing business |
| Any changes in economic factors that materially adversely affect consumer transactions could reduce the volume of transactions that we process and have a material adverse effect on our business, financial condition and results of operations |
| Recently, there has been increasing penetration of electronic banking services into the check cashing and money transfer industry, including debit cards, direct deposit of payroll checks, electronic payroll payments and electronic transfer of government benefits |
| To the extent that checks are replaced with such electronic transfers or electronic transfer systems developed in the future, demand for our check cashing services could decrease, which decrease could be material |
| In addition, the risk that we assume upon cashing a check is that the check will be uncollected because of insufficient funds, stop payment orders, or fraud |
| If the amount of checks we cash that are uncollected increases significantly, our revenues, cash flow and net income will be materially adversely affected |
| Our money transfer and money order revenues are derived from a key third-party relationship and a loss of that relationship could adversely affect our revenues, cash flow and net income |
| We are a party to a money order agreement with MoneyGram under which we exclusively sell their money orders that bear our logo |
| Under this agreement, we are obligated to make prompt remittances of money order proceeds |
| We are also an agent for the receipt and transmission of wire transfers of money through the MoneyGram network in accordance with an agreement with MoneyGram |
| Approximately 7prca of our total revenues for the year ended June 30, 2006 were derived from 31 _________________________________________________________________ [86]Table of Contents these agreements |
| Our relationship with MoneyGram is therefore significant to our business |
| Accordingly, if any disruption in this relationship occurs, it could materially and adversely affect our revenues, cash flow and net income |
| Any disruption in the availability of our information systems could adversely affect operations at our stores |
| Our information systems include a proprietary point-of-sale system in our stores and a management information system |
| Our personal computer-based point-of-sale system is fully operational in all company-owned stores, is used by our self-service machines for cashing checks and accepting third-party bill payments and is licensed for use by our franchised stores |
| The management information system is designed to provide summary and detailed information to district managers, regional vice presidents and corporate managers at any time through the Internet |
| Any disruption in the availability of our information systems could affect our operations and could adversely affect our business |
| Our business may suffer if our trademarks and service marks are infringed |
| We rely on trademarks and service marks to protect our brand name in our markets around the country |
| Many of these trademarks and service marks have been a key part of establishing our business in the community |
| We believe these trademarks and service marks have significant value and are important to the marketing of our services |
| These can be no assurance that the steps we have taken or will take to protect our proprietary rights will be adequate to prevent misappropriation of our rights or the use by others of features based upon, or otherwise similar to, ours |
| In addition, although we believe we have the right to use our trademarks and service marks, there can be no assurance that our trademarks and service marks do not or will not violate the proprietary rights of others, that our trademarks and service marks will be upheld if challenged, or that we will not be prevented from using our trademarks and service marks, any of which occurrences could harm our business |
| Part of our business is seasonal, which causes our revenues to fluctuate and may adversely affect our ability to service our debt |
| Our business is seasonal to the extent of the impact of cashing tax refund checks and tax refund anticipation loan checks |
| The impact of these services is primarily in the third and fourth quarters of our fiscal year |
| Also, our consumer loan business declines slightly in the third fiscal quarter as a result of customers’ receipt of tax refund checks and tax refund anticipation loans |
| This seasonality requires us to manage our cash flows over the course of the year |
| If our revenues were to fall substantially below what we would normally expect during certain periods, our annual financial results would be adversely impacted and our ability to service our debt may also be adversely affected |
| Because we maintain a significant supply of cash in our stores, we may be subject to cash shortages due to employee error and theft |
| Since our business requires us to maintain a significant supply of cash in each of our stores, we are subject to the risk of cash shortages resulting from employee errors and theft |
| Although we have implemented various procedures and programs to reduce these risks, maintain insurance coverage for theft and provide security for our employees and facilities, we cannot assure you that employee error and theft will not occur |
| Material occurrences of error and theft could lead to cash shortages and could adversely affect our results of operations |
| The price of our common stock may be volatile |
| In the past three years, stocks listed on the Nasdaq National Market, as our common stock is, have experienced high levels of volatility and significant declines in value from their historic highs |
| The trading price of our common stock has fluctuated, and may continue to fluctuate, substantially from time to time |
| The fluctuations could cause you to lose part or all of your investment in our shares of common stock |
| Those factors that could cause fluctuations in the trading price of our common stock include, but are not limited to, the following: § price and volume fluctuations in the overall stock market from time to time, § significant volatility in the market price and trading volume of financial services companies, § actual or anticipated changes in our earnings or fluctuations in our operating results or in the expectations of securities analysts, § general economic conditions and trends, § major catastrophic events, 32 _________________________________________________________________ [87]Table of Contents § loss of a significant client or clients, § sales of large blocks of our stock, or § departures of key personnel |
| In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company |
| Due to the potential volatility of our stock price, we may therefore be the target of securities litigation in the future |
| Securities litigation could result in substantial costs and divert management’s attention and resources from our business |
| Insiders have substantial control over us and could limit your ability to influence the outcome of key transactions, including a change of control |
| As of June 30, 2006, our principal shareholders, directors and executive officers, and entities affiliated with them, owned approximately 13prca of the outstanding shares of our common stock |
| As a result, these shareholders, if acting together, are able to influence or control matters requiring approval by our shareholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions |
| They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests |
| The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our shareholders of an opportunity to receive a premium of their common stock as a party of a sale of our company and might ultimately affect the market price of our common stock |
| Our operations could be subject to natural disasters and other business disruptions, which could adversely impact our future revenue and financial condition and increase our costs and expenses |
| Our operations could be subject to natural disasters and other business disruptions, which could adversely impact our future revenue and financial condition and increase our costs and expenses |
| For example, in August 2005, certain of our stores in the New Orleans and Baton Rouge area were closed for varying periods as a result of Hurricane Katrina |
| In addition, the occurrence and threat of terrorist attacks may directly or indirectly affect economic conditions, which could in turn adversely affect demand for our services |
| In the event of a major natural or manmade disaster, we could experience loss of life of our employees, destruction of facilities or business interruptions, any of which could materially adversely affect us |
| More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States economy and worldwide financial markets |
| Any of these occurrences could have a material adverse effect on us and also may result in volatility of the market price for our securities |
| Our business may be adversely affected if the acquisition by Ace Holdings is not completed |
| On June 6, 2006, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ace Holdings I, LLC, a Delaware limited liability company formed by JLL Partners Fund V, LP (“Ace Holdings”), and Ranger Merger Sub, Inc, a Texas corporation and a wholly-owned subsidiary of Ace Holdings (“Merger Sub”), pursuant to which Merger Sub will be merged with and into us, and we will continue as the surviving corporation and be a wholly-owned subsidiary of Ace Holdings (the “Merger”) |
| Under the terms of the Merger Agreement, at the effective time of the Merger, each outstanding share of common stock of ACE will be converted into the right to receive dlra30dtta00 in cash |
| The Merger is subject to several customary conditions, including the approval by the affirmative vote of a majority of the outstanding shares of Company common stock and the receipt of certain regulatory and other approvals |
| If this acquisition is not completed, we could be subject to a number of risks that may adversely affect our business, including: § the consequences of our management’s attention having been diverted from our day-to-day business over an extended period of time; and § the significant costs and expenses that we will have incurred relating to the acquisition |