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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Commission File Number 0-20774

ACE CASH EXPRESS, INC.

(Registrant’s telephone number, including area code) (972) 550-5000

Securities registered pursuant to Section 12(b) of the Act:

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 19, 2002, 10,180,588 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 $62,364,204.

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.

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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 franchiser of check-cashing stores in the United States. As of August 31, 2002, the Company had a total network of 1,189 stores in 35 states and the District of Columbia, consisting of 1,002 company-owned stores and 187 franchised stores. 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 each of the markets where the Company operates. 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.

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; providing money transfer services using the MoneyGram network; and offering small, short-term consumer loans, including (in most locations) loans made by Goleta National Bank. Many company-owned stores also offer bill-payment services, lottery and lotto tickets, 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 8,000 check-cashing stores nationally. Though there is limited public information available, the Company believes that there are four other check-cashing companies operating or franchising over 100 stores and five companies that operate or franchise between 50 and 100 locations, with the remaining companies operating fewer than 50 stores, in the United States.

The Company believes that it and other check-cashing companies offer services that banks do not provide and operate 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, 2002, 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.

The Company believes that the deregulation of the banking and savings and loan industry has increased the role played by check-cashing stores in providing basic financial transaction services to low-income and middle-income customers. At the same time, the Company believes that competition, regulatory scrutiny and complexity are contributing to consolidation of the industry. The Company’s strategy is to position itself to benefit from industry consolidation and the competitive advantages available to large operators and franchisers of retail financial services.

Growth Strategy

ACE’s growth strategy consists principally of combining acquisitions and new store openings with the objective 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

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544 company-owned stores in 19 states as of June 30, 1996, to a network of 1,187 company-owned and franchised stores in 35 states as of June 30, 2002. In fiscal 2002, the Company opened 39 newly-constructed stores, acquired 8 stores, franchised 22 stores, and closed 32 company-owned stores. The Company currently anticipates that it will construct and open 20 company-owned stores, primarily in existing markets, during the fiscal year ending June 30, 2003. The Company’s growth strategy depends upon the availability of adequate financing, as well as suitable locations, acquisition opportunities, and experienced management employees, and is subject to the risk that any of these conditions may not be met. The Company’s growth in owned stores in fiscal 2002 was, and growth in owned stores in fiscal 2003 is expected to be, smaller than the Company’s historical growth primarily because of limitations on capital expenditures imposed by the Company’s existing bank credit agreement. The Company intends to continue to pursue additional sources of capital for growth and intends to focus on expanding the Company’s franchise network, which requires a minimal amount of capital.

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The following table illustrates the development of company-owned stores since June 30, 1996 by showing the number of stores open in each market area at the end of each of the indicated periods:

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Acquisitions. During fiscal 2002, the Company acquired 8 stores in four separate transactions. The Company believes its experience with acquisitions permits it to successfully integrate additional acquisitions. Of the 1,003 ACE company-owned stores in operation as of June 30, 2002, 403, or 40%, 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, 2003. The Company intends to continue searching for strategic opportunities in both existing and new markets, subject to the availability of capital.

Self-service machines. The Company has developed self-service machines which are able to cash checks, sell prepaid long-distance telephone cards, sell money orders, and process third-party bill payments. The Company placed 100 of the self-service machines in H&R Block locations during the 2002 tax season (i.e., January through March). Those machines only cashed tax-refund checks issued by one bank to customers of H&R Block. The Company currently has 22 machines in company-owned locations and 150 machines available for deployment at H&R Block locations during the 2003 tax season.

Franchise Operations

With the acquisition of Check Express, Inc. and its wholly-owned franchising subsidiaries in February 1996, the Company became one of the largest franchisers of check-cashing stores in the United States. ACE franchises are marketed through an employee sales force, supplemented by advertising in newspapers, trade journals, and other media. As of June 30, 2002 and 2001, there were 184 and 175 company-franchised stores open and operating, respectively, in 29 states, as follows:

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, a small market franchise for market areas under 15,000 in population, and a conversion franchise that permits an existing check-cashing business to convert to an ACE franchisee. The Company opened 22 franchised stores, acquired eight former franchised stores, transferred one franchised store, and closed four franchised stores during fiscal 2002. The majority of franchised stores operate under the “ACE” name, by license from the Company.

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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 of approximately $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.

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:

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. In fiscal year 2002, approximately 3.2% of the check cashing fees were derived from SSM’s located in the Company’s stores or in H&R Block offices.

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 proprietary information 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. Historically, the Company offered “payday loans,” a check-based service, at its locations to the extent permitted by applicable state law; however, state law did not permit the Company to offer payday loans at many of its locations. Though the Company continued to offer payday loans at a few of its locations, since May 2000 it has offered the short-term loans made by Goleta National Bank (“Bank Loans”) at almost all of its locations. Offering the Bank Loans has enabled the Company to offer its customers a single or standard loan product at almost all of its locations in all states and the District of Columbia. As a result of recent changes in state laws and regulations and in state-regulatory approaches, in the fourth quarter of fiscal 2002, the Company ceased to offer Bank Loans at its locations in Colorado, Louisiana, Maryland, and Missouri. To the extent permissible, the Company has begun to offer short-term or payday loans which are in compliance with the states’ new laws and regulations. As of June 30, 2002, ACE was a licensed provider of state regulated loans in Colorado, Louisiana, Missouri and South Carolina, and since June 30, 2002, has become a licensed provider in Oklahoma. The Company plans to become a licensed provider of state-regulated loan products in Arizona, Indiana, and Virginia. The Company anticipates that regulatory issues or constraints will also prompt the Company to convert its loan service offering from the Bank Loans to state-regulated loans in certain other states.

The Bank Loans are made by Goleta National Bank (“Goleta”), a national bank located in California. The Bank Loan process at a Company-owned store consists of the following:

1.		A customer completes a loan application to Goleta.
2.		The customer’s information from the application is entered into the Company’s point-of-sale system and transmitted electronically to Goleta.

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3.		Applying its credit criteria, Goleta makes a decision in California whether to approve or deny the application for a Bank Loan.
4.		If the application is approved, the borrower completes and signs Bank Loan documents, which are made available by Goleta to the borrower electronically through the Company’s point-of-sale system, in favor of Goleta.
5.		Goleta opens a bank account for the borrower at Goleta in California and places the borrowed funds into that account.
6.		Goleta activates a debit card and issues a corresponding personal identification number (“PIN”), through which the borrower has access to the funds in his or her bank account, and the Company delivers the card and the PIN to the borrower.
7.		The borrower can then withdraw the proceeds of the Bank Loan from his or her bank account by using the debit card and the PIN at any Company-owned store or at various other retail stores or ATM locations.

The Bank Loan process at a Company-owned store is typically completed in 15 to 20 minutes. A Bank Loan may be repaid at any Company-owned store, and the Company will deposit the payment in an account for Goleta. A Bank Loan may also be repaid by Goleta’s debiting the borrower’s checking account through an Automated Clearing House (ACH) transaction, as authorized by the borrower. During the fiscal year ended June 30, 2002, the average principal amount of a Bank Loan was approximately $269. As of June 30, 2002, Bank Loans were offered in 848 of the Company’s owned stores.

Where the Bank Loans are not offered, and where legally permitted, the Company offers small, short-term loans, which are commonly referred to as “payday loans,” at its locations. The Company’s payday loan service or product consists of providing a customer cash in exchange for the customer’s check or an ACH authorization to debit the customer’s bank account, along with an agreement to defer the presentment or deposit of that check or the initiation of that ACH debit on the customer’s account, as the case may be, for a period of 14 to 30 days. The amount of the customer’s check or ACH authorization is the amount of the cash provided to the customer plus a fee to the Company. The term of the deferral of the check presentment or ACH debit is typically two to four weeks. Because payday loans are authorized by statute or rule in the states in which they may be offered, they are subject to extensive regulation. But the scope of that regulation, including the terms on which payday loans may be made, by the states is not, and has not been, consistent. Almost all of the states establish allowable fees and other charges to consumers for these payday loans. In addition, many of the states regulate the maximum amount, maturity, and renewal or extension of these payday loans. To comply with the laws and regulations of the states in which the Company’s payday loans are offered, the terms of those payday loans must vary somewhat from state to state. As required, ACE is or has been licensed as a provider of payday loans under the laws and regulations of the states in which that service or product is offered. As of June 30, 2002, the Company offered state-regulated loans in 105 of its owned stores.

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 20,000 MoneyGram locations nationwide (including other ACE stores) and over 55,000 agent 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 11.6 million money orders during the fiscal 2002. 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.

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Franchise revenues. The Company’s franchise revenues consist of royalties and initial and optional franchise fees. There were 184 company-franchised stores in operation as of June 30, 2002, compared to 175 as of June 30, 2001.

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, prepaid debit/credit cards, public transportation passes, copying and fax transmission services, postage stamps, prepaid local telephone time, and prepaid long-distance telephone cards.

Self-service machines. The Company has developed self-service machines which are able to cash checks, sell prepaid long-distance telephone cards, sell money orders, and process third-party bill payments. The Company currently has 22 machines in company-owned locations and 150 machines available for deployment at H&R Block locations during the 2003 tax season (i.e., January through March). These machines use the Company’s proprietary software that, among other things, reads checks and analyzes customer and check-issuer history, thereby enabling the Company to assess credit risk before cashing a check. The Company leases the machine hardware from Diebold, Incorporated, a manufacturer of self-service banking products and ATMs. Each of the Company’s self-service machines is connected with the Company’s point-of-sale computer system.

The Company entered into an agreement with H&R Block under which the company placed 100 machines in H&R Block locations during the 2002 tax season. Those machines were available only to cash tax-refund checks issued to customers of H&R Block. The Company obtained the cash that constituted the inventory for those 100 machines through a separate agreement with a bank. The agreement with H&R Block also anticipates the Company’s placing up to 250 of its machines at H&R Block Locations during the 2003 tax season. Implementation of this agreement, however, will require the Company to obtain an operating lease for the self-service machine hardware and capital to constitute inventory for those machines. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — SSM Funding.”

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, 183 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.

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.

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The following tables show the average annual store revenues and the average store contribution for company-owned stores which were opened in the year indicated and remain open as of June 30, 2002:

The capital cost of opening a new store varies depending on the size and type of store. During fiscal 2002, the Company opened 39 company-owned stores at an average capital cost of approximately $55,000 per store.

During fiscal 2002, the Company had 76 self-service machines in company-owned stores. The Company placed 100 self-service machines at H&R Block retail offices during the 2002 tax season During fiscal year 2002, the Company’s machines (located in Company stores or in H&R Block offices) cashed 214,000 checks with a face value of $185 million, which generated net check-cashing fees to the Company of $3.8 million (3.2% of the Company’s total check-cashing fees). The majority of the checks cashed were tax checks in H&R Block offices. After the end of fiscal 2002, the Company moved approximately 50 self-service machines from company-owned stores to H&R Block offices for use during the 2003 tax season.

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. There also can be no assurance that the Company’s self-service machines will continue to generate the same level of revenues as in the past or that the machines can be successfully deployed at H&R Block offices during the 2003 tax season.

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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 are invited to join the ACE PLUS gold card retention program, which rewards members with benefits like free check-cashing commensurate with the volume of check-cashing done at ACE. Also, through its 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 one of two division vice presidents 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 91 stores each. The Company currently has 73 district managers, each of whom reports to the RVP for his or her region and is directly responsible for the general management of up to 25 stores within his or her territory. These district managers are responsible for hiring, scheduling, operations, marketing, and employee relations. Each center manager reports to a district manager, and has direct responsibility over his or her store’s operations.

Service associates, center managers, district managers, 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 principal 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. This point-of-sale system is also used in the Company’s self-service machines for cashing checks. 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 checks cashed, 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);
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.

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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 employee and non-employee 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 2002 and 2001, cash shortages from employee errors and from theft were approximately $2.1 million (0.9% of revenues) and $2.9 million (1.5% 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 managers conduct 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. ACE employees are not authorized to transport currency or checks.

Employees

At June 30, 2002, ACE employed 2,336 persons: 980 service associates at company-owned stores, 995 center or store managers, 75 district managers, 11 regional vice presidents, 35 region support personnel, 231 corporate employees and 9 franchise personnel. Third-party firms hired by the Company conduct background checks of all Company 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. The Company’s stores have also recently been facing competition from automated check-cashing machines, sometimes referred to as CCM’s (check-cashing machines) or SSM’s (self-service machines), deployed in supermarkets, convenience stores, and other public venues by large financial services organizations. There is no assurance that the Company will be able to compete successfully with its competitors.

Trademarks and Patents

The Company has obtained several federal trademark registrations, including for “A-C-E America’s Cash Express®”, “ACE®” and its logo design

On May 9, 2002 and June 19, 2002. the Company applied to the U.S. Patent and Trademark Office for two process patents related to its software used in the self-service business and those patent applications are pending.

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 recording and reporting of certain financial

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transactions and relating to the privacy of customer information. Further, the Company’s loan-related activities are subject to federal regulation and, in certain states, to state regulation.

State Regulations. The Company operates in 17 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, 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 of or equal to the fees charged by the Company.

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 operates or has operated as a “payday” or other short-term consumer lender, it is or has been licensed as such and is or has been subject to the regulations governing the terms of payday or other short-term consumer loans. Though the Company has obtained or maintained a small-loan or other specialized lender’s license in certain states in which Bank Loans are or have been offered, the Company believes that its activities related to the Bank are generally not subject to state regulation; the Company believes that the Bank Loans are subject primarily to federal regulation applicable to Goleta as a lending national bank. See “Legal Proceedings.”

Federal Regulations. Under the Bank Secrecy Act regulations of the United States 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 permit the Company to comply with these 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. This registration is intended to enable governmental authorities to better enforce laws prohibiting money laundering and other illegal activities. The Company registered as a money services business with the Treasury Department, by filing with the Financial Crimes Enforcement Network of the Treasury Department (“FinCEN”), by December 31, 2001, and must re-register at least every two years thereafter. The Company, as a money services business, must also maintain a list of names and addresses of, and other information about, its agents and must make that list available to any requesting law enforcement agency (through FinCEN). That agent list must be updated at least annually. The Company does not believe that compliance with the these existing requirements has had or will have any material impact on its operations.

In addition, federal regulations 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. Because of the Company’s point-of-sale system and employee-training programs, the Company does not believe that compliance with the existing reporting requirement has had or will have any material impact on its operations. The federal regulatory authorities, however, are in the process of adopting additional regulations to implement specific provisions of this Act (e.g., procedures regarding the identity of persons opening accounts and corresponding recordkeeping), and the Company cannot estimate the impact of any of those additional regulations.

The Gramm-Leach-Bliley Act and its implementing federal regulations require the Company to generally protect the confidentiality of its customers’ nonpublic personal information and to disclose to its customers its privacy policy and practices, including those regarding sharing the customers’ nonpublic personal information with third parties. That disclosure must be made to customers at the time that the customer relationship is established and at least annually thereafter.

The USA PATRIOT Act of 2001 and its implementing federal regulations require the Company, as a “financial institution,” to establish and maintain an anti-money-laundering program. Such a program must include (1) internal policies, procedures, and controls designed to identify and report money laundering, (2) a designated compliance officer, (3) an ongoing employee-training program, and (4) an independent audit function to test the program. Because of its compliance with other federal regulations having essentially a similar purpose, the Company does not believe that compliance with these requirements has had or will have any material impact on its operations.

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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”). Because of the Company’s contractual relationships with Goleta, the Company’s activities regarding the Bank Loans are also subject to regulation and examination by the OCC and the other regulatory authorities to which Goleta is subject. To the extent an examination involves review of the Bank Loans and related processes, the OCC or other regulatory authority may require the Company to provide requested information and grant access to the Company’s locations, personnel, and records regarding the Bank Loans. The OCC’s examinations and reviews of Goleta have included on-site reviews of the Company’s activities at certain of its locations as well as discussions with certain personnel of the Company.

On November 27, 2000, the OCC issued OCC Advisory Letter 2000-10 to all national banks. In that Advisory Letter, the OCC acknowledged that a national bank may offer small, short-term loans if those loans are made in a “safe and sound” manner and in compliance with applicable consumer-protection and fair-lending laws. The Advisory Letter described various “safety and soundness, compliance, consumer protection, and other risks” to national banks that are posed by payday and similar short-term lending and are of concern to the OCC. The Advisory Letter also contained the OCC’s guidelines, or various recommended policies and procedures, to address those risks and avoid abusive lending practices. Further, the OCC expressed its view that arrangements that involve a national bank appointing a non-bank as agent significantly increase the various risks to the national bank and, therefore, the OCC’s supervisory concerns. The OCC indicated that it would carefully review existing and proposed short-term lending activities and agency arrangements of that kind, including by direct examination of the national bank and the agent or agents involved in the arrangements. The OCC also warned that agency arrangements of that kind might not afford the agent’s activities the same federal pre-emption of state and local law that a national bank’s lending activities enjoy.

On November 1, 2001, the OCC issued OCC Bulletin 2001-47 to all national banks. In that Bulletin, the OCC identified the risks to national banks that might arise from their business relationships with agents and acknowledged or recommended corresponding risk-management principles. The OCC reiterated its various concerns regarding agency arrangements of the general kind that Goleta has with the Company and warned that the OCC would carefully scrutinize any such arrangement, to avoid any “abuse of the national bank charter.”

In the first three months of 2002, the OCC ordered one national bank to cease its short-term or “payday” loan program and filed charges against another national bank regarding its management of its short-term or “payday” loan program. It appears to the Company, however, that the banks’ issues that prompted the OCC’s action were not limited to those banks’ short-term loan programs. More recently, other federal regulatory agencies have taken actions that have resulted in two other financial institutions (not national banks) discontinuing their short-term or payday loan programs.

In March 2002, the Company received information regarding the most recent report of the OCC delivered to Goleta regarding, among other things, Goleta’s contractual relationship with the Company. The OCC’s report apparently expressed strong reservations about, and identified certain reputational, compliance, and transaction risks to Goleta’s “safety and soundness” arising from Goleta’s short-term loan program and relationship with the Company. More recently, other federal regulatory agencies have taken action that have resulted in two other financial institutions (not national banks) discontinuing their short-term or payday loan programs. In addition, for over two years, Goleta has been subject to a formal written agreement with the OCC that requires Goleta to, among other things, adhere to certain operational and reporting requirements, some of which relate to Goleta’s short-term loan program and relationship with the Company. The Company understands that Goleta has been informed that the OCC does not believe that Goleta is in full compliance with certain provisions of the formal agreement that relate to compliance with certain laws and regulations applicable to the short-term loan program.

Representatives of Goleta and the Company have had discussions between themselves and with representatives of the OCC about the OCC’s concerns regarding the Bank Loans and the actions that might be taken to address those concerns. The Company believes that it and Goleta have not determined whether any particular modifications of their policies and procedures regarding the Bank Loans and their relationship will be able to address those concerns. The discussions between the Company and Goleta, and with the OCC, have also included the possibility of gradually reducing the scope of or phasing out the program. But until Goleta and the Company determine, through further discussions with the OCC, what will be required to satisfy the OCC’s concerns, the Company cannot state what actions will be taken and, therefore, how those actions might affect the Company’s loan-related business and revenues. The OCC possesses extensive regulatory authority in determining how, or even if, the Goleta short-term loan program will continue.

Governmental action to prohibit or restrict payday loans and other short-term loans has been advocated over the past few years by consumer-advocacy groups and by media reports and stories. The consumer groups and media stories typically focus on the cost to a consumer for that 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 payday loan or other short-term loan, but renews (or “rolls over”) that loan for one or more additional short-term (e.g., two-

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week) periods. The consumer groups and media stories typically characterize short-term lending activities as “abusive” toward consumers. During the last few years, legislation has 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 prohibit or restrict payday loans and other short-term loans. So far as the Company is aware, no such federal legislation or federal regulatory proposal has made any significant progress in the legislative or regulatory process. But legislation and regulatory action that affects consumer lending has recently become effective in a few states and may be taken in other states. See “Legal Proceedings.” The Company intends to continue, with others in the payday loan and short-term loan industry, to oppose legislative or regulatory action that would prohibit or restrict payday loans or short-term loans. But if legislative or regulatory action with that effect were taken on the federal level or in states such as Texas, in which the Company has a significant number of stores, that action could have a material adverse effect on the Company’s loan-related activities and revenues.

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 for bill-payment services (which also has a five-year term), the Company received $3 million from Travelers Express in April 1998, and was to receive $400,000 each of the remaining years of the contract for a total of $5.0 million. As of June 30, 2002, the final year contract balance of $400,000 remains unpaid. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and Note 5 of Notes to Audited 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 amounts received from Travelers Express. The money order agreement with Travelers Express does not allow an extended deferral of remittances of money order proceeds without a significant change in the Amended Collateral Trust Agreement. 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.”

MoneyGram Services Agreement. The Company is an agent for the receipt and transmission of wire transfers of money through the MoneyGram network. The Company’s agency relationship was previously governed by the 1996 MoneyGram Master Agreement, as amended (the “Expired MoneyGram Agreement”), with MoneyGram Payment Systems, Inc. (“MPS”), an affiliate of Travelers Express, until it expired on December 31, 2000.

In June 2000, the Company signed a Money Transfer Agreement with Travelers Express and MPS that became effective on January 1, 2001 (the “Existing MoneyGram Agreement”). During the seven-year term of the Existing MoneyGram Agreement, the Company will exclusively offer and sell MoneyGram wire transfer services. Under the Existing MoneyGram Agreement (as under the Expired MoneyGram Agreement), the Company earns commissions for each transmission and receipt of money through the MoneyGram network effected at a company-owned location; those commissions equal varying percentages of the fees charged by MPS to consumers for the MoneyGram services.

Under the Existing MoneyGram Agreement, the Company is also entitled to receive a total of approximately $12.5 million in 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 Existing 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 Existing MoneyGram Agreement similar to those received under the Expired MoneyGram Agreement.

The Existing MoneyGram Agreement extended and strengthened 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

The Company is a party to the Master Loan Agency Agreement, as amended, and ancillary agreements (collectively, the “Goleta Agreement”) with Goleta National Bank, a national bank located in Goleta, California , under which short-term loans made by Goleta are offered at most company-owned locations. Under the Goleta Agreement, the offering of Bank Loans is also subject to various operational requirements of Goleta set forth in its Bank Loan Operating Manuals delivered to the Company (the “Operating Manuals”).

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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.

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 company-owned locations.

A Bank Loan may be repaid at an ACE company-owned location or deducted from the borrower’s bank account through an ACH transaction, 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 90 percent of the interest received by Goleta from the borrowers, and subjects the Company to 90 percent of the risk of nonpayment by the borrowers. The Company must pay Goleta a processing fee for Goleta’s originating the Bank Loans.

The Company is responsible under the Goleta Agreement for 90 percent of any third-party claims, including regulatory claims, regarding the Bank Loans other than claims resulting solely from Goleta’s misconduct. See “Legal Proceedings.”

The Company has agreed in the Goleta Agreement not to offer at its company-owned locations any short-term loan that is substantially similar to the Bank Loans, except that the Company may offer payday loans or other short-term loans where the Company has decided not to offer Bank Loans (because of contractual, legal, or regulatory limitations) and may offer short-term loans by other lenders at a limited number of its company-owned locations. Goleta has 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 the 12-month period beginning April 14 of each year.

The term of the Goleta Agreement will expire on April 13, 2007, 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 the 12-month period beginning April 14 of each year. As of June 30, 2002, the number of Bank Loan applications submitted to Goleta exceeded the minimum required to extend the exclusivity.

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, (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, or (4) Goleta’s termination of the Company’s authority to offer Bank Loans at a significant number of company-owned stores because the Company’s operations at those particular locations do not comply with the Operating Manuals. In addition, Goleta may terminate (a) the Goleta Agreement if it reasonably determines that the Company is not in compliance with the Operating Manuals and the noncompliance is not cured after notice of noncompliance from Goleta, and (b) the Company’s authority to offer Bank Loans at one or more particular locations if the Company’s operations at those locations do not comply with the Operating Manuals and the noncompliance at those locations is not cured after notice of noncompliance from Goleta. The Company may also terminate the Goleta Agreement 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 to exercise its right to terminate the Goleta Agreement.

The Goleta Agreement permits the Company to offer Bank Loans at many more of its locations than it could offer payday loans. 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 payday loans at many of its locations) the Company’s loan-related revenues could be materially and adversely affected.

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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.”

The Company’s investment in ePacific was made at the same time, 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 B. 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.

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

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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 collateral trust continues to exist, though the Original Collateral Trust Agreement has been amended and superseded in connection with the establishment and renewals of the Company’s credit facilities with a syndicate of bank lenders, as described below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Credit Facilities.”

Credit Facilities

During the year ended June 30, 2002, the Company was a party to an Amended and Restated Credit Agreement (the “Credit Agreement”) with a syndicate of banks (the “Lenders”), led by Wells Fargo Bank Texas, National Association (“Wells Fargo Bank”).

The Credit Agreement provided the Company with a revolving line-of-credit facility and a term-loan facility. The revolving facility was available for working capital and general corporate purposes of the Company, and the term-loan facility was available for capital expenditures of the Company. Also, in addition to the primary credit facilities, the Company had available, from Wells Fargo Bank and certain of the other Lenders, a seasonal revolving advance facility of up to $25 million from January 1 through March 31, 2002, and, from Wells Fargo Bank, a standby letter-of-credit facility of up to $1.5 million.

The Credit Agreement was amended three times during the fiscal year: (1) on November 8, 2001, to extend the maturity of the credit facilities until December 31, 2001, and to revise certain other terms; (2) on December 31, 2001, to extend the maturity of the credit facilities until April 30, 2002, and to revise certain other terms; and (3) on April 30, 2002, to extend the maturity of the credit facilities until October 31, 2002, and to revise certain other terms. The terms of the Credit Agreement as so amended 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 optional 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 two of the Company’s stores are located, one in Indianapolis, Indiana and the other in Tampa, Florida. The Company’s headquarters offices in Irving, Texas, a suburb of Dallas, occupy approximately 56,000 square feet under an 84-month lease, the term of which expires in 2008.

ITEM 3. LEGAL PROCEEDINGS

Loan-Related Proceedings

A number of lawsuits and state regulatory proceedings have been filed or initiated against the Company regarding its loan-related activities. Those activities consist of (1) offering Bank Loans, which are short-term loans made by Goleta National Bank (“Goleta”), at most of the Company’s locations, and (2) offering a check-based service commonly known as a “payday loan” at certain of its locations. Before May 2000, the Company offered only payday loans at its locations in jurisdictions that it believed legally permitted that service. See “Business — Customers and Services — Loan services” and “ — Bank Loans.” The lawsuits and state regulatory proceedings pending as of September 23, 2002, are described below.

A key issue in the existing lawsuits and state regulatory proceedings that concern the Bank Loans is whether Goleta or the Company is properly regarded as the lender. The Company and Goleta maintain that, as stated in the legal documents and marketing materials for the Bank Loans, Goleta is the lender and that, because Goleta is a national bank located in California, the Bank Loans, including the interest that may legally be charged, should be governed by federal and California law. The opposing parties in most of these lawsuits and regulatory proceedings, however, maintain that the Company should be regarded as the lender, because of its agent services in connection with the Bank Loans and its purchase of participation interests in the Bank Loans, and that the Bank Loans, including the interest that may legally be charged, should be governed by the laws of the respective states in which the borrowers reside. If the Company were held to be the lender, then the interest charged for the Bank 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. The consequences to the Company of such a holding in any lawsuit or regulatory proceeding would depend on the applicable state’s usury and consumer-protection laws and on the basis for a finding of violation of those laws. But those consequences could include the Company’s obligation to refund interest collected on the illegal Bank Loans, to refund the principal amount of the illegal Bank Loans, to pay treble or other multiple damages, to pay monetary penalties specified by statute, and to cease offering the Bank Loans (at least as theretofore offered). The Company is committed to defend these lawsuits through trial and, if necessary, appeal.

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The Company expects that the defense of the lawsuits and state regulatory proceedings described below, even if successful, will continue to require substantial time and attention of certain of its senior officers and other management personnel that would otherwise be spent on other aspects of its business and will continue to require the expenditure of significant amounts for legal fees and other litigation-related costs. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Litigation Expenses.” In addition, the Company would be adversely affected if it were unable to successfully defend against the claims made in these lawsuits and state regulatory proceedings. The effects on the Company of an adverse determination would vary depending on the particular adverse determination and the particular lawsuit or regulatory proceeding in which it occurred. In general, however, the Company believes that the effects of an adverse determination regarding its payday-loan service would be less severe than the effects of an adverse determination regarding its offering of Bank Loans. If the Company were held to be the lender of the Bank Loans, then the Company would likely (1) become obligated to pay amounts as damages and other relief that could significantly impair the Company’s financial condition and financial resources, and its business as a whole (and not merely its loan-related business), and (2) be ordered to cease the offering of Bank Loans by Goleta or to significantly modify the terms on which Bank Loans are offered. Even if, under such circumstances, the Company were required only to cease offering the Bank Loans or to significantly modify the terms on which the Bank Loans are offered, then its loan-related revenues could be materially impaired.

Pending Lawsuits — Payday Loans

Eva J. Rowings v. Ace Cash Express, Inc.: This lawsuit regarding the Company’s former “payday loan” activities in Indiana was filed against the Company in the United States District Court for the Southern District of Indiana on December 17, 1999. The plaintiff, for herself and others similarly situated, alleged that (1) the Company’s disclosures to recipients of payday loans in Indiana did not comply with the disclosure requirements of the federal Truth in Lending Act (“TILA”), Regulation Z of the Federal Reserve Board (“Regulation Z”), and the Indiana Uniform Consumer Credit Code (the “Indiana UCCC”), and (2) the Company’s payday-loan finance charges exceeded those permitted by the Indiana UCCC and by Indiana Code 35-45-7-2 (Indiana’s “loansharking” statute), so that those loans were void. Regarding the disclosure-violation claims, the plaintiff sought to represent a class of the Company’s payday-loan customers since December 17, 1998. Regarding the excess-finance-charge claims, the plaintiff sought to represent a class of the Company’s payday-loan customers since December 17, 1997 who were assessed finance charges at an annual interest rate greater than 72%. The plaintiff sought to recover, for herself and members of the respective putative classes, monetary damages for the disclosure-violation claims as specified by the federal TILA, Regulation Z, and the Indiana UCCC, unspecified damages for the excess-finance-charge claims, the plaintiff’s attorneys’ fees and expenses, court costs, and other appropriate relief.

On August 28, 2002, the court approved a class settlement agreement, under which the Company agreed to pay approximately $400,000, and entered an order dismissing all claims in this lawsuit with prejudice. Unless appealed, that order will become final and effective on September 27, 2002.

Wendy Betts, John Cardegna and Gary M. Kane v. Ace Cash Express, Inc. et al.: This lawsuit regarding the Company’s former deferred-deposit (“payday loan”) activities in Florida was filed in a Florida state Circuit Court in Orange County, Florida, against the Company, its wholly owned subsidiary Check Express, Inc., and certain unnamed persons described in the complaint. In this lawsuit the plaintiffs, for themselves and others similarly situated since January 27, 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.

In February 2001, the Attorney General of the State of Florida filed a motion to intervene as a plaintiff in this lawsuit, but the court denied that motion. On May 29, 2001, the court dismissed the plaintiffs’ complaint with prejudice. The plaintiffs appealed that dismissal, but on August 30, 2002, the Florida appellate court affirmed the trial court’s decision. On September 13, 2002, the plaintiffs filed a motion for rehearing of the appeal, and that motion is pending before the appellate court.

Eugene R. Clement v. Ace Cash Express, Inc. and Neil Gillespie v. Ace Cash Express, Inc.: This lawsuit regarding the Company’s former deferred-deposit (“payday loan”) activities in Florida is pending in a Florida state Circuit Court in Hillsborough County, Florida. It is the result of the consolidation on August 8, 2000 of two separate lawsuits filed against the Company in the court. Each of those lawsuits purported to be a class action and alleged that the Company’s deferred-deposit activities violated the federal TILA, the Florida usury laws, and the Florida Deceptive and Unfair Trade Practices Act (“FDUTPA”). The plaintiffs sought an injunction against any further alleged illegal activities as well as actual and punitive

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damages of various kinds, including damages under the federal TILA, 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.

The Attorney General of the State of Florida (the “Attorney General”) intervened as a plaintiff in this lawsuit. The intervenor complaint filed on April 11, 2001 named as defendants, in addition to the Company, the Company’s Chairman of the Board, Raymond C. Hemmig; the Company’s Chief Executive Officer, Donald H. Neustadt; and two former employees of the Company. The intervenor complaint alleged violations by the Company and the other defendants of the Florida RICO Act and the FDUTPA. The intervenor complaint sought all remedies available under the Florida RICO Act, including the civil forfeiture of all money and other property of the Company used in, derived from, or realized through the Company’s deferred-deposit activities in Florida, the revocation of each license or permit of the Company granted by any Florida state agency, and an injunction against future violations of the FDUTPA or the Florida RICO Act. The intervenor complaint also sought, because of alleged violations of other Florida laws, the payment to Florida consumers of actual damages caused by the Company’s illegal activities, the payment to the State of Florida of certain civil penalties, the divestiture of any interests of the Company in Florida real property, and the payment of attorneys’ fees and costs.

On July 7, 2001, the court dismissed plaintiffs Clement’s and Gillespie’s existing complaints without prejudice. Plaintiffs Clement and Gillespie filed an amended complaint, and the court dismissed all of Gillespie’s claims, and all but one of Clement’s claims, with prejudice. Plaintiff Gillespie appealed the dismissal of his claims. On June 12, 2002, the Company entered into a settlement agreement with plaintiffs Clement and Gillespie in which the Company agreed to pay each of them a nominal amount. Accordingly, on July 2, 2002, plaintiff Gillespie voluntarily dismissed with prejudice his appeal, and on July 14, 2002, the trial court dismissed with prejudice the remaining claim in plaintiff Clement’s complaint.

On August 29, 2001, the Attorney General filed an amended complaint that restated its previous allegations against the Company and the other named defendants under the FDUTPA and the Florida RICO Act and that also named as additional defendants a current franchisee and a former franchisee of the Company in Florida. On March 27, 2002, the court dismissed with prejudice the Attorney General’s complaint against one of the former employees of the Company, and on May 20, 2002, the Attorney General appealed that dismissal. That appeal is pending.

On May 22, 2002, the court dismissed, without prejudice, all but one of the claims asserted by the Attorney General against the Company and all of the claims asserted by the Attorney General against the current franchisee in Florida. On June 5, 2002, upon request by the Attorney General, the court dismissed the claims against the current franchisee with prejudice, thereby permitting the Attorney General to appeal that decision. The Attorney General subsequently filed such an appeal. The remaining claims of the Attorney General before the trial court are against the Company concerning a small dollar amount of its renewal transactions; against Messrs. Hemmig and Neustadt and the remaining former employee of the Company; and against the Company’s former franchisee. The motion to dismiss filed by Messrs. Hemmig and Neustadt and the former employee and the motion to dismiss filed by the former franchisee have not yet been considered by the court. The Company intends to file a motion for summary judgment regarding the remaining claims against it.

Mayella Veasey et al. v. Ace Cash Express, Inc.: This lawsuit regarding the Company’s former deferred-presentment (“payday loan”) activities in Arkansas was filed in the Arkansas state Circuit Court of Pulaski County, Arkansas, in December 2000 and was served on the Company on March 22, 2001. The plaintiff, for herself and others similarly situated, alleged that the Company’s deferred-presentment transactions in Arkansas from June 15, 1999 to May 1, 2000 violated the usury laws of Arkansas. The plaintiff is represented by the same counsel that represented the plaintiffs in the previous lawsuit against the Company in Arkansas regarding deferred-presentment transactions. That previous lawsuit, which was settled by the Company in October 2000, related to the Company’s deferred-presentment transactions in Arkansas through June 15, 1999, when a statute that expressly authorized such transactions, the Check Cashers Act, became effective in Arkansas. The Company believes that this new lawsuit was prompted by the decision of the Arkansas Supreme Court in March 2001 to the effect that a portion of the Check Cashers Act was unconstitutional insofar as it may purport to construe or define the usury provisions of the Arkansas Constitution. That decision did not, however, address the legality of any deferred-presentment transaction effected under the Check Cashers Act. Because the Company has offered only short-term loans made by Goleta National Bank at the Company’s locations in Arkansas since May 1, 2000, the Company has not entered into any deferred-presentment transactions in Arkansas since that date. The complaint sought damages in an amount equal to twice the amount paid by customers of deferred-presentment transactions in Arkansas during the specified 101/2-month period as well as the plaintiff’s reasonable attorneys’ fees and costs.

On March 6, 2002, the Company entered into a settlement agreement with the plaintiff under which it agreed to pay a total of $300,000. On July 12, 2002, the court entered an order approving the settlement agreement and dismissing the plaintiff’s complaint with prejudice. That order became final and effective on August 12, 2002.

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Pending Lawsuits — Bank Loans

Jennafer Long v. Ace Cash Express, Inc.: This lawsuit regarding Bank Loans offered and made at the Company’s locations in Florida was filed in a Florida state Circuit Court in Clay County, Florida, and was served on the Company on November 8, 2000. The plaintiff, for herself and others similarly situated, alleges that the Bank Loans offered at the Company’s locations in Florida are being made by the Company rather than by Goleta and, therefore, that those Bank Loans violate Florida usury laws and the offering of those Bank Loans involves misrepresentations and deceptive practices in violation of Florida law. The plaintiff seeks an unspecified amount of damages, including an amount equal to all interest charged on the Bank Loans made in Florida, the plaintiff’s attorneys’ fees, and court costs.

The Company’s attempt to remove this case to federal court was unsuccessful. On October 2, 2001, the court granted Goleta’s motion to intervene as a defendant in this lawsuit. The Company and Goleta filed a motion to dismiss the plaintiff’s complaint on the basis that Goleta is the lender of the Bank Loans and, under federal law, is entitled to charge interest at the rate permitted by California law. But on March 20, 2002, the court denied that motion, and on April 19, 2002, each of the Company and Goleta filed its answer to the plaintiff’s complaint. The parties are conducting discovery in this lawsuit.

Vonnie T. Hudson v. Ace Cash Express, Inc. et al.: This lawsuit regarding the Bank Loans offered and made at the Company’s locations in Indiana was filed on September 11, 2001 in the United States District Court for the Southern District of Indiana. This lawsuit was filed against the Company; Goleta; the Company’s Chairman of the Board, Raymond C. Hemmig; the Company’s Chief Executive Officer, Donald H. Neustadt; the Company’s President and Chief Operating Officer, Jay B. Shipowitz; and a former employee of the Company. The plaintiff alleged violations of (1) the Indiana UCCC and the Indiana “loansharking” statute, because the interest charged for the Bank Loans exceeded the finance charges permitted by those statutes, (2) the federal TILA, Regulation Z, and the Indiana UCCC, because the disclosures to borrowers of Bank Loans did not comply with the disclosure requirements of those laws, and (3) the federal RICO Act. In the complaint the plaintiff purported to represent a class of all persons to whom a Bank Loan has been made at any location of the Company in Indiana (a) since September 11, 1999, regarding the excess-charge claims, (b) since September 11, 2000, regarding the disclosure-violation claims, and (c) since September 11, 1997, regarding the federal RICO Act claims. The plaintiff sought relief of various kinds, including (i) for the members of the class of plaintiffs who were allegedly charged excessive interest, an order declaring the Bank Loans to them “void,” the refund of all finance charges or interest paid by them in excess of the maximum finance charges permitted under the Indiana UCCC, and a penalty (to be determined by the court) in a maximum amount equal to the greater of either all of the finance charges or interest received from them or up to ten times the amount of all excess finance charges or interest received from them; (ii) for the members of the class of plaintiffs who allegedly did not receive proper disclosures under the federal TILA, Regulation Z, and the Indiana UCCC, statutory damages of $500,000 each for violations of those statutes; (iii) for the members of the class of plaintiffs allegedly damaged because of violations of the RICO Act, an amount equal to three times those damages; and (iv) the plaintiff’s attorneys’ fees and court costs. The plaintiff’s counsel are the same as the plaintiff’s counsel in the Eva J. Rowings lawsuit described above.

On December 17, 2001, the defendants filed a motion to dismiss the plaintiff’s complaint, and on May 30, 2002, the court granted the motion. Based on its review of the complaint and other filed documents, the court concluded that Goleta made the Bank Loan to the plaintiff and then sold a participation interest in that Bank Loan to the Company, so that the claims asserted in the complaint were not sufficient to entitle the plaintiff to any damages or other legal relief. The court, however, afforded the plaintiff an opportunity to amend her complaint to assert legally sufficient claims.

On June 25, 2002, the plaintiff filed an amended complaint, which is substantially similar to the complaint that was dismissed, except that the amended complaint does not name Goleta as a defendant and does not assert any disclosure-violation claims. On July 8, 2002, the Company and other remaining defendants filed a motion to dismiss the amended complaint, asserting that the amended complaint did not allege sufficient new facts to justify relief and that the court’s initial decision is dispositive. On August 8, 2002, the plaintiff filed an opposition to that motion. The motion is pending before the court.

Pending Lawsuits — Payday Loans and Bank Loans

Rufus Patricia Brown v. Ace Cash Express, Inc. et al.: This lawsuit regarding both the Company’s former “payday loan” activities and the Bank Loans offered and made at the Company’s locations in Maryland was filed on August 20, 2001 in the Circuit Court for Baltimore City, Maryland. On September 12, 2001, the plaintiff filed an amended complaint against the Company and unnamed franchisees of the Company. In the complaint, the plaintiff purports to represent a class of all consumers with whom the Company has entered into any payday-loan transaction or to whom a Bank Loan has been made at any location of the Company in Maryland since April 1, 2000. The plaintiff alleges that the defendants’ loan-related activities violate the Maryland usury laws, the Maryland Consumer Loan Law, the Maryland Unsecured Closed End Credit

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Regulation Act, and the Maryland Consumer Protection Act and are unconscionable under Maryland law. The plaintiff seeks relief of various kinds, including a permanent injunction against any further alleged illegal activities, an order that all obligations of the class of plaintiffs to the defendants are void, the return (as restitution) to the class of plaintiffs of all amounts paid to the defendants, an order dissolving the Company and prohibiting all defendants from conducting any further financial services business, the disgorgement and return of all profits from the loan-related activities, the plaintiff’s attorneys’ fees and expenses, and court costs.

On September 7, 2001, the Company removed this lawsuit to the United States District Court for the District of Maryland, but on November 14, 2001, the federal court granted the plaintiff’s motion to remand this lawsuit back to the Circuit Court of Baltimore City. On January 3, 2002, Goleta filed a motion to intervene as a defendant in this lawsuit, and the court granted that motion on January 8, 2002. The parties are conducting discovery in this lawsuit.

Beverly Purdie v. Ace Cash Express, Inc. et al.: This lawsuit regarding both the Company’s former “payday loan” activities and the Bank Loans offered and made at the Company’s locations was filed on September 6, 2001 in the United States District Court for the Northern District of Texas. The original complaint named as defendants the Company and certain of the executive officers and directors and a former employee of the Company. As the result of two amended complaints, however, only the Company and Goleta are currently defendants in this lawsuit. In her second amended complaint, the plaintiff purports to represent a class of all consumers in the United States with whom the Company has entered into any payday-loan transaction or to whom a Bank Loan has been made at any location of the Company since September 6, 1997, as well as sub-classes of persons who have engaged in those kinds of transactions with the Company or at the Company’s locations and are alleged to be victims of usury or of unfair or deceptive lending practices under the laws of various states in the United States during the time periods within the various applicable statutes of limitations. The plaintiffs allege that the defendants’ loan-related activities violate the federal RICO Act and the laws and regulations of various states regarding usury, deceptive trade practices (including the Texas Deceptive Trade Practices Act), and other consumer protections. The plaintiff seeks relief of various kinds, including a permanent injunction against any further alleged illegal activities; the return (as restitution) to the class and sub-classes of plaintiffs of all amounts paid to the defendants; damages equal to three times the amount of all fees and interests paid by the class and sub-classes of plaintiffs since September 6, 1997; punitive damages of at least $250 million; the plaintiff’s attorneys’ fees; and court costs.

On January 18, 2002, the Company and Goleta filed a motion to dismiss the second amended complaint, asserting that the federal RICO Act claims are legally deficient and should be dismissed and that, if those claims are dismissed, the court should not retain jurisdiction of the remaining state-law claims. On February 7, 2002, the plaintiff filed an opposition to that motion. The motion is pending before the court.

General: Because each of these 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 persons who constitute the class of plaintiffs (if permitted by the court) or the number or the amount of the loan-related transactions during an applicable time period, and (for certain of the claims) on proof of actual damages sustained by the plaintiffs. The Company intends to vigorously defend these lawsuits.

State Regulatory Proceedings

Notice from Ohio Department of Commerce: On July 16, 2001, the Ohio Department of Commerce delivered a Notice of Intent to Issue Cease and Desist Order and Notice of Opportunity for Hearing to the Company. In this Notice, the Ohio Superintendent of the Division of Financial Institutions (the “Superintendent”) asserted that the Company, not Goleta, is the lender or the maker of the Bank Loans made in Ohio; that those Bank Loans violate the Ohio Small Loan Act and are void; that all finance charges and interest received from those Bank Loans, as well as the outstanding principal of all such existing Bank Loans, should be forfeited; and that the Company should be ordered to cease violating the Ohio Small Loan Act.

On October 12, 2001, Goleta filed a complaint in the United States District Court for the Southern District of Ohio against the Superintendent. The complaint requests the court to enjoin the Superintendent from enforcing the Ohio Small Loan Act against the Company or Goleta in connection with the Bank Loans in Ohio. Goleta concurrently filed a motion for preliminary injunction against the Superintendent’s continuing the administrative action. On November 23, 2001, the Superintendent filed a motion opposing Goleta’s motion for a preliminary injunction and a motion to dismiss Goleta’s complaint. On December 14, 2001, Goleta filed a motion opposing the Superintendent’s motion to dismiss and a brief in support of its motion for preliminary injunction; and on January 4, 2002, the Superintendent filed its reply brief. On January 4, 2002, a “friend-of-the-court” brief in favor of the Superintendent was filed by the attorneys general or consumer protection agencies of 16 states: Alabama, Alaska, Arizona, Colorado, Connecticut, Indiana, Iowa, Kansas, Louisiana, Massachusetts, Nevada, New Mexico, North Carolina, Vermont, West Virginia, and Wyoming. On February 12, 2002, Financial Services Centers of America, Inc., the largest trade association for the payday-loan industry, filed a “friend-of-the-court” brief in favor of the Company and Goleta. The motions are pending before the court.

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North Carolina Lawsuits: As the result of inquiries and statements to the Company by North Carolina governmental authorities in early January 2002, the Company and Goleta learned that those authorities intended to institute legal proceedings against the Company regarding the offering of Bank Loans in North Carolina. In response, on January 14, 2002, the Company and Goleta filed a complaint in the United States District Court for the Eastern District of North Carolina against Hal D. Lingerfelt, the Commissioner of Banks of North Carolina, and Roy Cooper, the Attorney General of North Carolina (collectively, the “State”). In the complaint, the Company and Goleta requested that the court (1) declare that the Bank Loans and related activities of Goleta and the Company are governed by federal law, which preempts any contrary North Carolina law, and (2) enjoin the State from alleging any violations of North Carolina law because of those Bank Loans and related activities and from seeking to prohibit or restrict those loans and related activities by applying North Carolina law. On May 23, 2002, the federal court granted the State’s motion to dismiss the complaint filed by the Company and Goleta. On June 21, 2002, the Company and Goleta filed an appeal of that dismissal in the United States Court of Appeals for the Fourth Circuit, which is pending.

Also on January 14, 2002 (but after the complaint of the Company and Goleta was filed in federal court), the State filed a complaint in North Carolina state court in Wake County, North Carolina, against the Company (but not Goleta). The complaint alleges that the Company rather than Goleta is the lender of the short-term loans in North Carolina and, therefore, that the Company’s loan activities violate the North Carolina Consumer Finance Act and other North Carolina usury laws and the North Carolina Check Casher Act (under which the Company is licensed as a check casher). In the alternative, the complaint alleges that if the Company is not the lender, it is arranging or brokering loans for North Carolina consumers on behalf of Goleta in violation of the North Carolina Loan Broker Act. The complaint also alleges that, in either case, the Company’s loan activities violate North Carolina laws against unfair and deceptive acts or practices. In the complaint, the State seeks relief of various kinds, including a permanent injunction against the Company’s loan-related activities regarding North Carolina consumers; a judicial declaration that the loans made by the Company in violation of North Carolina are void and usurious; an order that the Company refund all amounts collected by it as a result of the unlawful loans; an order that the Company forfeit all interest and pay an amount equal to twice the interest collected from North Carolina borrowers; and the plaintiffs’ attorneys’ fees and costs. On January 31, 2002, the Company removed this lawsuit to the United States District Court for the Eastern District of North Carolina, but on May 14, 2002, the federal court granted the State’s motion to remand this lawsuit back to North Carolina state court. The parties are conducting discovery in this lawsuit.

Non-Loan-Related Proceeding

Ace Cash Express, Inc. v. Valley Check Cashiers, Inc., Jeffrey D. Silverman, and Morris Silverman: On November 27, 2001, the Company filed this lawsuit in Texas state court in Travis County, Texas, seeking damages relating to the defendants’ misrepresentations and breaches of warranties in an Asset Purchase Agreement between the Company and the defendants, and certain other entities affiliated with the defendants, dated as of November 10, 2000. Under the Asset Purchase Agreement, the Company acquired the assets of 107 check-cashing and retail financial services locations owned and managed by the defendants and their affiliated entities for a total purchase price of $29.7 million in cash. Eleven of the acquired locations were in third-party grocery stores, operated under the “Handy Andy” name, in and around San Antonio, Texas. Following the foreclosure and sale of those grocery stores by the secured creditor of the grocery store operator, the Company (in cooperation with the sellers under the Asset Purchase Agreement) instituted litigation against that creditor and its purchaser in January 2001 to maintain the Company’s right to operate in those locations. At a trial in April 2001, the court found that the lease agreement under which the Company claimed the right to occupy those eleven locations, which had been assigned to the Company by the defendants and their affiliated entities, was not enforceable under Texas law. The court therefore ordered the Company to vacate those eleven locations, which the Company did in June 2001. Because of the court’s finding, the Company requested the defendants to satisfy their monetary obligations to the Company, based on their representations and warranties, regarding those locations. When it appeared that further negotiations regarding the Company’s request would be unsuccessful, the Company filed this lawsuit to recover the damages suffered in connection with, and as a result of, the loss of those eleven locations. In its complaint, the Company seeks actual damages in excess of $2 million. On January 14, 2002, the defendants filed their answer denying all of the Company’s material claims. The parties are conducting discovery in this lawsuit.

Other Incidental Proceedings

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.

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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 2002.

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 19, 2002, there were approximately 97 holders of record of the Common Stock, and there were approximately 1,515 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:

On September 19, 2002, the last reported sale price of the Common Stock on NASDAQ was $8.55 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”).

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ITEM 6. SELECTED FINANCIAL DATA