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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

Commission File Number 0-20774

ACE CASH EXPRESS, INC.

1231 Greenway Drive, Suite 600
Irving, Texas 75038
(Address of principal executive offices)

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

None
(Former name, former address and former fiscal year, if changed since last report)

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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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ACE CASH EXPRESS, INC.

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PART I. FINANCIAL INFORMATION

ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS

ACE CASH EXPRESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

The accompanying notes are an integral part of these consolidated financial statements.

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ACE CASH EXPRESS, INC. AND SUBSIDIARIES
INTERIM UNAUDITED
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share amounts)

The accompanying notes are an integral part of these consolidated financial statements.
..

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ACE CASH EXPRESS, INC. AND SUBSIDIARIES
INTERIM UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

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ACE CASH EXPRESS, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed interim consolidated financial statements of Ace Cash Express, Inc. (the “Company” or “ACE”) and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission. They do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Although management believes that the disclosures are adequate to prevent the information from being misleading, the interim consolidated financial statements should be read in conjunction with the Company’s audited financial statements in its Annual Report on Form 10-K for the year ended June 30, 2003, filed with the Securities and Exchange Commission. In the opinion of Company management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation, have been included.

Certain prior period balances have been reclassified to conform to the current period’s presentation.

Revenue Recognition Policy

Approximately 90% of the Company’s revenues result from transactions at the point-of-sale with its customers, and approximately 65% of the Company’s revenues are effectively recognized when the transaction is completed at the point-of-sale. These transactions include check cashing, bill payment, money transfer, money order sales, and other miscellaneous products and services grouped in “other fees.” The Company acts in an agency capacity regarding some of the products and services offered and sold at its stores, and therefore records as revenue the amounts received from customers less amounts remitted to the provider.

For short-term or “payday” loans made by the Company, for the Republic Loans (as defined below) for which the Company acts only as marketing agent and servicer (for a fee from the lender), and (during the fiscal year ended June 30, 2003) for the Company’s participation interests in Goleta Loans (as defined below), revenues constituting loan fees and interest (whether paid by the customer or the lender) are recognized ratably over the term of each loan, which is generally 14 days.

Contractual revenue guarantees from product or service providers are recognized in accordance with the terms of the contracts under which they are paid. Any bonus or incentive payments from product or service providers are amortized over the term or duration of the contracts under which they are made.

Franchised store revenue consists of the up front franchise fees charged for opening the franchised store and on-going royalty fees. Franchise fees, which are the initial fees paid by the franchisees, are recognized when the franchise location has been identified, the lease has been obtained, training has occurred, the building has been built or leasehold improvements have been completed, the proprietary point-of-sale system has been installed and the store has been opened. Franchise royalty fees are a percentage of each franchisee’s actual revenues, and these are recognized monthly and payable under the franchise agreement.

Earnings Per Share

Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the weighted average number of common shares outstanding, after adjusting for the dilutive effect of stock options. Restricted stock that has been granted and not forfeited to or repurchased by the Company is included in common shares outstanding for both calculations. The following table presents the reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per share:

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The following table presents the options to purchase shares of common stock which were not included in the computation of diluted earnings per share for the three months ended September 30, 2003 and 2002 because the exercise prices of those options were greater than the average market price of the common shares; therefore, the effect would be anti-dilutive.

Fair Value of Financial Instruments

The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than a forced sale or liquidation. The amounts reported in the consolidated balance sheets for accounts receivable, loans receivable, accounts payables, revolving advances, money orders payable, and notes payable all approximate fair value because of the short-term maturities of these instruments. Term advances approximate fair value because of the recent refinancing of these obligations.

Recently Issued Accounting Pronouncements

In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS No. 123” (“SFAS 148”). SFAS 148 was issued to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS No. 123 to require disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Entities are still permitted to account for stock-based compensation programs using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” The Company currently accounts for stock-based compensation using the intrinsic value method. The interim disclosure requirements prescribed by SFAS 148 are included in these interim consolidated financial statements.

In December 2002, the Financial Accounting Standards Board issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. This applied to guarantees issued or modified subsequent to December 31, 2002, but had certain disclosure requirements effective June 30, 2003. FIN 45 had no effect on the Company’s financial position and results of operations. The Company made the disclosures required by FIN 45 in these interim consolidated financial statements.

In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 requires that variable interest entities be consolidated by their primary beneficiary. FIN 46 became effective with all financial statements issued after January 31, 2003. FIN 46 had no effect on the Company’s financial position and results of operations.

In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS 150 establishes standards for how an

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issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 has not had an effect on the Company’s financial position and results of operations.

Stock Incentive Plans

At September 30, 2003, the Company sponsored one employee stock incentive plan, which permits the grant of stock options and restricted stock, and one non-employee director stock option plan. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Stock-based employee compensation cost of $88,400 is reflected in the Company’s reported net income for the three months ended September 30, 2003, corresponding to 137,500 shares of restricted stock granted under the employee stock incentive plan through September 30, 2003. No other stock-based employee compensation is reflected in the Company’s reported net income, because all stock options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

The weighted average fair value of each employee option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants during the three months ended September 30, 2003 and 2002: expected volatility of 46% for each period; expected lives of 6.0 and 6.1 years, respectively; risk-free interest rates of 2.9% and 3.3%, respectively; and no expected dividends. Outstanding options are generally exercisable annually in installments over a three- to four-year period from the date of grant at an exercise price of not less than the fair market value at the grant date. The options expire at ten years after date of grant. Restricted stock generally vests over a three- to four-year period from the date of grant. As of September 30, 2003, 1,649,449 shares were reserved for stock grants, 1,529,588 shares had been granted, and 119,861 shares were available for stock grants.

The weighted average fair value of each non-employee director option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants during the three months ended September 30, 2003 and 2002: expected volatility of 46% for each period; expected lives of 4.9 and 5.0 years, respectively; risk-free interest rates of 2.9% and 3.3%, respectively; and no expected dividends. Outstanding options are generally exercisable annually in installments over a three-year period from the date of grant at an exercise price of not less than the fair market value at the grant date. The options expire five years after date of grant. As of September 30, 2003, 190,250 shares were reserved for stock grants, 126,250 shares had been granted, and 64,000 shares were available for stock grants.

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2. OPERATING SEGMENTS

The Company’s reportable segments are strategic business units that differentiate between company-owned and franchised stores. Company-owned store revenue is generated from store customer-transaction processing, and franchised store revenue is generated from the franchise fees charged for opening the store and on-going royalty fees from franchisees. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

Segment information for the three months ended September 30, 2003 and 2002 was as follows:

Additional segment information as of September 30, 2003 and 2002 was as follows:

3. DERIVATIVE INSTRUMENTS

The Company’s objective in managing its exposure to fluctuations in interest rates is to decrease the volatility of earnings and cash flows associated with changes in the applicable rates. To achieve this objective, the Company has entered into interest-rate swap agreements. The interest-rate swaps are derivative instruments related to forecasted transactions and are considered to hedge future cash flows. The effective portion of any gains or losses are included in accumulated comprehensive income (loss) until earnings are affected by the variability of cash flows. Any ineffective portion is recognized currently into earnings. The cash flows of the interest-rate swaps are expected to be highly effective in achieving offsetting cash flows attributable to fluctuations in the cash flows of the floating-rate revolving loan facility and floating-rate term loan notes. If it becomes probable that a forecasted transaction will no longer occur, the interest-rate swap will continue to be carried on the balance sheet at fair value, and gains or losses that were deferred in accumulated comprehensive income (loss) will be recognized immediately into earnings. If the interest-rate swaps are terminated prior to their expiration dates, any cumulative gains and losses will be deferred and recognized into earnings over the remaining life of the underlying exposure. If the hedged liabilities are to be sold or extinguished, the Company will recognize the gain or loss on the designated financial instruments currently into earnings.

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The Company uses the cumulative approach to assess effectiveness of the cash flow hedges. The measurement of hedge ineffectiveness is based on the cumulative dollar offset method. Under this method, the Company compares the changes in the floating rate component of the cash flow hedge to the floating rate cash flows of the revolving loan facility and the term loan notes. Changes in the fair value of the effective cash flow hedges are recorded in accumulated comprehensive income (loss). The effective portion that has been deferred in accumulated comprehensive income (loss) will be reclassified to earnings when the hedged items impact earnings.

The associated underlying hedged liability has exceeded the notional amount for each of the Company’s interest-rate swaps throughout the existence of the interest-rate swaps, and it is anticipated that it will continue to do so with respect to the swaps in effect as of September 30, 2003. The interest-rate swaps are based on the same index as their respective underlying debt. The interest-rate swaps to date have been highly effective in achieving offsetting cash flows attributable to the fluctuations in the cash flows of the hedged risk, and no amount has been required to be reclassified from accumulated comprehensive income (loss) into earnings for hedge ineffectiveness or due to excluding a portion of the value from measuring effectiveness during the three months ended September 30, 2003 or 2002.

The last of the original four interest rate swaps (related to indebtedness under the Company’s former bank credit agreement) expired as of January 1, 2003, and the Company entered into two new interest-rate swaps during the fourth quarter of fiscal 2003. The interest-rate swaps resulted in an increase of interest expense of $105,000 and $906,000 for the three months ended September 30, 2003 and 2002, respectively.

The average notional amounts related to the interest rate swaps are as follows (in millions):

The effective interest rates for the notional amounts related to the revolving advance and term loan notes as of September 30, 2003 are as follows:

The fair value of the interest-rate swaps increased by $244,000 and $496,000, net of tax, during the three months ended September 30, 2003 and 2002, respectively, and those increases have been recorded in accumulated comprehensive loss. The estimated net amount of existing loss expected to be reclassified into earnings during the next twelve months is $411,000.

Accumulated comprehensive loss balances related to the interest-rate swaps are as follows (in thousands):

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The accumulated comprehensive loss as of September 30, 2003 and 2002, is net of a tax benefit of $516,000 and $388,000, respectively. The accumulated comprehensive loss as of June 30, 2003 and 2002, is net of a tax benefit of $678,000 and $737,000, respectively

A summary of comprehensive income (loss) for the three months ended September 30, 2003 and 2002 is presented below:

4. RESTRUCTURING CHARGES - ACCELERATED STORE CLOSINGS

In the third quarter of fiscal 2001, the Company recorded charges for the costs associated with closing 85 unprofitable or underperforming stores. The restructuring charge of $8.7 million consisted of costs associated with $7.7 million of write-offs for goodwill and covenants not to compete, fixed asset and inventory disposals, and lease terminations related to the store closings, and $1.0 million of impaired goodwill associated with nine underperforming stores not closed.

The accrual balance was $0.2 million as of September 30, 2003 and June 30, 2003. The accrual provides for the leases that will be paid out over their remaining terms, and the Company anticipates that the remaining liabilities will be paid by approximately February 2005.

5. GOODWILL AND OTHER INTANGIBLE ASSETS

Amortizable Intangible Assets

Covenants not to compete are as follows:

Covenants not to compete are amortized over the applicable period of the contract. The weighted-average amortization period is 5.1 years.

Amortization expense related to the covenants not to compete for the three months ended September 30, 2003 and estimated for the five succeeding fiscal years assuming current balances and no new acquisitions, are as follows:

Amortization Expense for Covenants Not to Compete
(in thousands)

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Intangible Assets Not Subject to Amortization

The carrying value of the Company’s goodwill is as follows:

Changes in the carrying value of goodwill for the three months ended September 30, 2003 are as follows:

There were no impairment losses for the three months ended September 30, 2003 or 2002.

6. SHORT-TERM LOANS

Until December 31, 2002, the Company was a party to a Master Loan Agency Agreement and ancillary agreements (the “Goleta Agreement”) with Goleta National Bank (“Goleta”), a national bank located in Goleta, California. Under the Goleta Agreement, short-term loans made by Goleta (“Goleta Loans”) were offered at most company-owned locations. A Goleta Loan could be up to $500 and had to be repaid or renewed in 14 days. Under the Goleta Agreement, the Company purchased from Goleta a participation representing 90% of each Goleta Loan made on a previous day. Goleta determined the interest rate (and other terms) of the Goleta Loans. Interest equal to $17 per $100 of Goleta Loan was charged by Goleta for each 14-day period. As of January 1, 2003, the Company no longer offered Goleta Loans at any of its stores.

Since January 1, 2003, all of the small, short-term loan products or similar services, commonly referred to as “payday loans,” offered at the Company’s stores have consisted of either (1) short-term loans or deferred-deposit services made or entered into by the Company, or (2) deferred-deposit loans or services (“Republic Loans”) made or entered into by Republic Bank & Trust Company, a Kentucky state-chartered bank (“Republic Bank”). As of September 30, 2003, the Company was offering its own small short-term loan or deferred-deposit service in 513 of its owned stores, and Republic Bank was offering Republic Loans in 349 of the Company’s owned stores in Texas, Pennsylvania, and Arkansas. All of these loans and services, regardless of type, are made in accordance with state regulation; therefore, the terms of the loans and services vary from state to state.

In general, the Company’s payday loan product or service consists of providing a customer cash in exchange for the customer’s check or an Automated Clearinghouse (“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, until the customer’s next payday. 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. During the quarter ended September 30, 2003, the average amount of cash provided to a customer in such a transaction was $265, and the average fee to the Company was $38.99. As of September 30, 2003 and June 30, 2003, the gross receivable for the Company’s payday loans was approximately $24.1 million and $20.2 million, respectively.

The Republic Loans are offered and made at the Company’s stores in accordance with a Marketing and Servicing Agreement with the Company dated as of October 21, 2002, as amended (the “Republic Bank Agreement”), which is scheduled to continue until January 1, 2006. The terms of the Republic Loans are generally similar to those of the Company’s own loan products or services, though Republic Bank has sole discretion regarding the terms of its loans or services. As of September 30, 2003, Republic Bank authorized loans up to $425 with a term of 14 days, and the interest charged by Republic Bank was $17.64 per $100 of loan value. Under the terms of the Republic Bank Agreement, Republic Bank pays the Company an agency fee for the Company’s services in marketing or processing the Republic Loans at the stores and in collecting outstanding Republic Loans. The Company does not acquire or own any participation interest in any of the Republic Loans, but the Company’s fees are subject to reduction by the losses from uncollected Republic Loans. The maximum potential

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future payments the Company could be obligated to make pursuant to the Republic Bank Agreement represent the total outstanding Republic Loans recorded on Republic Bank’s financial statements, which were $9.7 million as of September 30, 2003 and $10.4 million as of June 30, 2003.

Loan fees and interest, include the Company’s interest and fees received from its participation interests in Goleta Loans, its fees and interest received from customers of the Company’s payday loan product or service, and its agency fees received from Republic Bank related to Republic Loans. Loan fees and interest revenues are recognized ratably over the term of each loan, regardless of the type of revenue or loan.

The Company has established a loan loss allowance regarding its economic interests in the Company’s payday loans and (until 180 following the December 31, 2002 cessation of the Goleta Agreement) in the Goleta Loans. The Company’s policy for determining the loan loss allowance is based on historical loan loss experience generally, as well as the results of management’s review and analysis of the payment and collection of the loans within the last fiscal quarter. The Company’s policy is to charge off interests in all of the Company’s payday loans and Goleta Loans which are 180 days or more past due. Charge-offs are applied as a reduction to the allowance for loan losses and any recoveries of previously charged off loans are applied as an increase to the allowance for loan losses. The Company establishes a payable to Republic Bank to reflect the Company’s obligation to, in effect, bear all Republic Loan losses; that payable estimates such losses from such loans that are 180 days or more past due. The Company’s policy in establishing the payable regarding Republic Loan losses is substantially the same as its policy regarding the loan loss allowance for the other types of loans.

Loans receivable, net, on the consolidated balance sheets as of September 30, 2003 and June 30, 2003 were $14.2 million and $13.0 million, respectively, which includes receivables for the Company’s payday loans (but not regarding any Republic Loans, because the Company does not own any interest in those loans). The loan loss allowance of $9.9 million and $8.7 million as of September 30, 2003 and June 30, 2003, respectively, represented 41.0% and 40.2% of the gross loans receivable as of that date. Net loan charge-offs for the quarter ended September 30, 2003 and 2002, were $3.4 million and $4.7 million, respectively.

7. PENDING LAWSUITS AND SETTLEMENTS

The Company is a defendant in a number of lawsuits regarding its arrangements with Goleta regarding the Goleta Loans that were offered at most of the Company’s locations. A key issue in those lawsuits regarding the Goleta Loans was whether Goleta or the Company is properly regarded as the lender. If the Company, rather than Goleta, were held to be the lender, then the terms of the Goleta Loans, and the Company’s activities in connection with those Goleta Loans, would likely violate usury and other consumer-protection laws in certain states and, accordingly, the Company would likely become obligated to pay damages and other relief that could significantly impair the Company’s financial condition and financial resources. The Company and Goleta, however, strongly maintained that Goleta, and not the Company, was the lender of the Goleta Loans. A federal district court in Indiana agreed with the Company’s and Goleta’s position that Goleta is properly regarded as the lender of the Goleta Loans. This is the sole court decision to-date that has addressed the merits of this key issue. In addition, the Company has settled other lawsuits and administrative proceedings with state authorities regarding the Company’s activities related to the Goleta Loans.

On May 12, 2003, however, the Company entered into a settlement agreement regarding the purported nationwide class-action Goleta Loan-related lawsuit, Purdie v. Ace Cash Express, Inc. et al., pending in the United States District Court in Dallas, Texas. That settlement agreement, if finally approved by the court and implemented, will result in the release of substantially all of the claims of former borrowers against the Company (and Goleta) not only in the Purdie lawsuit, but also in the other pending Goleta Loan-related lawsuits. In the settlement agreement, the Company agreed, among other things, to pay:

•		at least $2.5 million as refunds to former borrowers who have repaid all of their Goleta Loans and who timely submit claims for refunds or, if the refunds and certain other amounts paid by the Company total less than $2.5 million, the amount of the shortfall to certain consumer-advocacy organizations;
•		up to $2.1 million as attorneys fees to the plaintiffs’ counsel in the lawsuits being settled and terminated; and
•		notice and other administrative costs in connection with the settlement.

The refund payable by the Company to each eligible former borrower who files a refund claim will be approximately five percent of the interest or finance charges paid by that borrower, but not less than $7.50 or more than $45.00.

Based on estimates of anticipated claims by eligible borrowers and of administrative and other costs related to the settlement, the Company recorded a $5 million charge for its settlement payment obligations in its financial statements in the third quarter of fiscal 2003. During the quarter ended September 30, 2003, the Company expensed an additional $0.1 million for administrative costs related to the settlement.

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On June 13, 2003, the federal court granted preliminary approval of the proposed settlement in the Purdie lawsuit. On October 15, 2003, the federal court held a fairness hearing regarding the terms of the proposed settlement, and the court has not yet made a final ruling on the settlement. In the fourth quarter of the fiscal year ended June 30, 2003, the Company recovered $4.7 million from liability insurance coverage for claims related to various Goleta Loan-related lawsuits.

The Company is also a plaintiff in a lawsuit against the seller of the assets of check-cashing and related financial services locations, and the two controlling persons of that seller, arising from an asset purchase agreement entered into in November 2000. Because of a court order requiring the Company to vacate 11 of the locations purported to be sold under the agreement, the Company filed the lawsuit seeking damages in excess of $2 million from the seller and its controlling persons. On March 24, 2003, the trial court granted a motion to dismiss the Company’s complaint against the two controlling persons (but not against the seller). On March 31, 2003, the Company filed an appeal of that order. On October 15, 2003, a Texas state appellate court heard oral arguments in the Company’s appeal, but the court has not yet ruled on the appeal. Although the Company believes that its legal claims in this lawsuit have merit, it has not determined that its likelihood of recovery is so probable as to justify reflecting any anticipated gain or recovery in the Company’s financial statements.

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ACE CASH EXPRESS, INC. AND SUBSIDIARIES
SUPPLEMENTAL STATISTICAL DATA
(unaudited)