ACE CASH EXPRESS INC/TX - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 0-20774

ACE CASH EXPRESS, INC.

(Exact name of registrant as specified in its charter)

Texas		75-2142963
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

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.


Class		Outstanding as of November 2, 2004
Common Stock, $.01 par value		13,447,079 shares

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)


	September 30,			June 30,
	2004			2004
	(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	104,052		$	123,041
Accounts receivable, net		5,214			5,555
Loans receivable, net		18,798			17,047
Prepaid expenses, inventories and other current assets		11,343			10,658

Total Current Assets		139,407			156,301

Noncurrent Assets
Property and equipment, net		30,966			30,721
Covenants not to compete, net		1,193			1,067
Goodwill, net		84,999			81,719
Other assets		5,765			3,839

Total Assets	$	262,330		$	273,647

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Revolving advances	$	42,400		$	60,000
Accounts payable, accrued liabilities and other current liabilities		32,308			32,711
Money orders payable		5,107			4,495

Total Current Liabilities		79,815			97,206

Noncurrent Liabilities
Deferred income tax		5,684			5,684
Deferred revenue		3,946			3,969
Other liabilities		302			358

Total Liabilities		89,747			107,217

Commitments and Contingencies		—			—
Shareholders’ Equity
Preferred stock, $1 par value, 1,000,000 shares authorized, none issued and outstanding		—			—
Common stock, $.01 par value, 20,000,000 shares authorized, 13,639,982 and 13,518,737 shares issued and 13,428,582 and 13,307,337 shares outstanding, respectively		134			133
Additional paid-in capital		98,184			95,941
Retained earnings		80,369			75,296
Accumulated comprehensive loss		(292	)		(170	)
Treasury stock, at cost, 211,400 shares		(2,707	)		(2,707	)
Unearned compensation - restricted stock		(3,105	)		(2,063	)

Total Shareholders’ Equity		172,583			166,430

Total Liabilities and Shareholders’ Equity	$	262,330		$	273,647

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

ACE CASH EXPRESS, INC. AND SUBSIDIARIES
INTERIM UNAUDITED

CONSOLIDATED STATEMENTS OF EARNINGS

(in thousands, except per share amounts)


	Three Months Ended
	September 30,
	2004		2003
Revenues	$	62,026	$	55,701
Store expenses:
Salaries and benefits		14,787		14,255
Occupancy		8,182		7,249
Provision for loan losses and doubtful accounts		7,468		6,351
Depreciation		1,687		1,737
Other		9,808		8,777

Total store expenses		41,932		38,369

Gross margin		20,094		17,332
Region expenses		5,219		4,477
Headquarters expenses		4,681		4,313
Franchise expenses		267		263
Other depreciation and amortization		706		1,017
Interest expense, net		593		2,235
Other expenses, net		172		16

Income before income taxes		8,456		5,011
Provision for income taxes		3,383		2,004

Net income	$	5,073	$	3,007

Earnings per share:
Basic	$	0.38	$	0.29
Diluted	$	0.37	$	0.28
Weighted average number of common shares outstanding:
Basic		13,366		10,296
Diluted		13,848		10,589

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

ACE CASH EXPRESS, INC. AND SUBSIDIARIES
INTERIM UNAUDITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Three Months Ended
	September 30,
	2004			2003
Cash flows from operating activities:
Net income	$	5,073		$	3,007
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,393			2,754
Provision for loan losses		7,424			6,486
Provision for doubtful accounts		44			(135	)
Loss on disposal of property and equipment		800			119
Deferred revenue		(548	)		(455	)
Compensation on restricted stock grants		423			88
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable		297			3,936
Loans receivable		(6,838	)		(5,743	)
Prepaid expenses, inventories and other current assets		(447	)		(209	)
Other assets		(2,224	)		(253	)
Accounts payable, accrued liabilities and other liabilities		(2,633	)		(6,487	)

Net cash provided by operating activities		3,764			3,108
Cash flows from investing activities:
Purchases of property and equipment, net		(3,036	)		(794	)
Intangible assets related to store acquisitions		(3,510	)		(60	)

Net cash used by investing activities		(6,546	)		(854	)
Cash flows from financing activities:
Net increase (decrease) in money orders payable		612			(1,334	)
Net repayments of revolving advances		(17,600	)		(14,900	)
Net repayments of term advances		—			(958	)
Net borrowings (repayments) of notes payable		3			(56	)
Proceeds from stock options exercised		777			109
Proceeds from restricted stock		1			1

Net cash used by financing activities		(16,207	)		(17,138	)

Net decrease in cash and cash equivalents		(18,989	)		(14,884	)
Cash and cash equivalents, beginning of period		123,041			108,110

Cash and cash equivalents, end of period	$	104,052		$	93,226

Supplemental disclosures of cash flows information:
Interest paid	$	732		$	2,270
Income taxes paid		253			351

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

ACE CASH EXPRESS, INC. AND SUBSIDIARIES

NOTES TO INTERIM 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” or “we” or “us”) and 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 our audited financial statements in our Annual Report on Form 10-K for the year ended June 30, 2004 filed with the Securities and Exchange Commission. In the opinion of our 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 97% of our revenue results from transactions at the point-of-sale with our customers, and approximately 66% of our revenue is effectively recognized when the transaction is completed at the point-of-sale. These transactions include check cashing, bill payment (including prepaid debit cards), money transfer, money order sales and other miscellaneous products and services grouped in “other fees.” We act in an agency capacity regarding some of the products and services offered and sold at our stores, and therefore record as revenue the amounts received from customers less amounts remitted to the provider.

For short-term consumer loans that we make, and for the loans or services (“Republic Loans”) made or entered into by Republic Bank & Trust Company, a Kentucky state-chartered bank (“Republic Bank”) for which we act only as marketing agent and servicer for a fee from the lender, revenue constituting loan fees and interest (whether paid by the customer or the lender) is recognized ratably over the term of each loan, which is generally 14 days.

We recognize contractual revenue guarantees from product or service providers 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.

Franchise revenue consists of up-front franchise fees charged for opening the franchised store and on-going royalty fees. We recognize franchise fees, which are the initial fees paid by the franchisees, when the franchised location has been identified, the lease has been obtained, the 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, which are the greater of a minimum fee or a percentage of each franchisee’s actual revenues, are recognized and payable monthly.

Earnings Per Share Disclosures

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 us 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:


	Three Months Ended
	September 30,
	2004		2003
	(in thousands)
Net income	$	5,073	$	3,007

Reconciliation of denominator:
Weighted average number of common shares outstanding - basic		13,366		10,296
Effect of dilutive stock options		482		293

Weighted average number of common shares outstanding – diluted		13,848		10,589

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, 2004 and 2003 because the exercise prices of those options were greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive:


	Three Months Ended
	September 30,
	2004		2003
Options not included in the computation of earnings per share		33,750		—

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, revolving advances, accounts payables and accrued liabilities, and money orders payable all approximate fair value because of the short-term maturities of these instruments.

Stock Incentive Plans

At September 30, 2004, we sponsored one employee stock incentive plan and one non-employee director stock incentive plan, both of which permit the grant of stock options and restricted stock. We account for those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations.

The following table presents restricted stock granted and forfeited under both the employee stock incentive plan and the non-employee director stock incentive plan, along with the corresponding stock-based compensation cost reflected in our reported net income for the three months ended September 30, 2004 and 2003:


	Three Months Ended
	September 30,
	2004			2003
Number of shares of restricted stock granted:
Employee stock incentive plan		56,000			137,500
Non-employee stock incentive plan		—			—

		56,000			137,500

Number of shares of restricted stock forfeited:
Employee stock incentive plan		(488	)		—
Non-employee stock incentive plan		—			—

		(488	)		—

Stock-based compensation expense for restricted stock grants:
Employee stock incentive plan	$	409,326		$	88,440
Non-employee director stock incentive plan		13,964			—

	$	423,290		$	88,440

No other stock-based employee compensation is reflected in our 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 we had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation:


	Three Months Ended
	September 30,
	2004			2003
	(in thousands,
	except per share amounts)
Net income, as reported	$	5,073		$	3,007
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all stock option awards, net of related tax effects		(579	)		(562	)
Deduct: Total stock-based non-employee director compensation expense determined under fair value based methods for all stock option awards, net of related tax effects		(24	)		—

Pro forma net income	$	4,470		$	2,445

Earnings per share:
Basic – as reported	$	0.38		$	0.29

Basic – pro forma	$	0.33		$	0.24

Diluted – as reported	$	0.37		$	0.28

Diluted – pro forma	$	0.32		$	0.23

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, 2004 and 2003:


	Three Months Ended
	September 30,
	2004			2003
Expected volatility		46	%		46	%
Expected life (years)		4.4			6.0
Risk-free interest rate		3.9	%		2.9	%
Expected dividends	None			None

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 ten years after the date of grant. Restricted stock generally vests over a three- to five-year period from the date of grant. In November 2003, our shareholders approved an amendment to the employee stock incentive plan, the 1997 Stock Incentive Plan, to increase by 400,000 the number of shares of common stock that may be issued upon exercise of options or granted as restricted stock. As of September 30, 2004, 1,520,838 shares were reserved for restricted stock or stock option grants, 1,102,800 shares had been granted as restricted stock or were subject to outstanding stock option grants, and 418,038 shares were available.

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 each of the three months ended September 30, 2004 and 2003:


	Three Months Ended
	September 30,
	2004			2003
Expected volatility		46	%		46	%
Expected life (years)		4.7			4.9
Risk-free interest rate		3.9	%		2.9	%
Expected dividends	None			None

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 the date of grant. As of September 30, 2004, 155,251 shares were reserved for stock or stock option grants, 106,251 shares had been granted as restricted stock or were subject to outstanding stock option grants, and 49,000 shares were available.

2. OPERATING SEGMENTS

Our 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. Segment information for the three months ended September 30, 2004 and 2003 was as follows:


	Company-owned			Franchised			Other			Total
	(in thousands)
Three months ended September 30, 2004:
Revenue	$	61,279		$	747		$	—		$	62,026
Gross margin		19,347			747			—			20,094
Region, headquarters, franchise expenses		(9,900	)		(267	)		—			(10,167	)
Other depreciation and amortization		(703	)		(3	)		—			(706	)
Interest income (expense), net		—			—			(593	)		(593	)
Other expenses, net		—			—			(172	)		(172	)

Income (loss) from continuing operations before taxes	$	8,744		$	477		$	(765	)	$	8,456

Three months ended September 30, 2003:
Revenue	$	55,104		$	597		$	—		$	55,701
Gross margin		16,735			597			—			17,332
Region, headquarters, franchise expenses		(8,790	)		(263	)		—			(9,053	)
Other depreciation and amortization		(1,015	)		(2	)		—			(1,017	)
Interest income (expense), net		—			—			(2,235	)		(2,235	)
Other expenses, net		—			—			(16	)		(16	)

Income (loss) from continuing operations before taxes	$	6,930		$	332		$	(2,251	)	$	5,011

Segment information as of September 30, 2004 and 2003 was as follows:


	Company-owned		Franchised		Total
	(in thousands, except for number of stores)
As of September 30, 2004:
Total assets	$	261,122	$	1,208	$	262,330
Number of stores		1,055		202		1,257
As of September 30, 2003:
Total assets	$	239,081	$	485	$	239,566
Number of stores		968		206		1,174

3. DERIVATIVE INSTRUMENTS – SWAP AGREEMENTS

Our objective in managing our 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, we have 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 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 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, we will recognize the gain or loss on the designated financial instruments currently into earnings.

We use 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, we compare 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 loss. The effective portion that has been deferred in accumulated comprehensive loss will be reclassified to earnings when the hedged items impact earnings.

The associated underlying hedged liability has equaled or exceeded the notional amount for each of our interest-rate swaps throughout the existence of the interest-rate swaps, and we anticipate that it will continue to do so with respect to the swaps in effect as of September 30, 2004. 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 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, 2004 or 2003.

The interest-rate swaps resulted in an increase of interest expense of $113,000 and $105,000 for the three months ended September 30, 2004 and 2003, respectively. The effective swap interest rates on September 30, 2004 and 2003, respectively, were 5.215% and 4.715%. The average notional amounts (in millions) and the related average effective swap interest rates for the three months ended September 30, 2004 and 2003 are as follows:


	September 30, 2004					September 30, 2003
			Average					Average
	Average		Effective			Average		Effective
	Notional		Swap			Notional		Swap
Corresponding Debt	Amount		Interest Rate			Amount		Interest Rate
Revolving advance	$	30		5.576	%	$	60		4.715	%
Term loan notes (expired)	$	—		—	%	$	20		14.465	%

The fair value of the interest-rate swaps decreased by $122,000 and increased $244,000, net of tax, during the three months ended September 30, 2004 and 2003, respectively. These changes 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 $261,000.

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


													Change in Accumulated
													Comprehensive Loss
	Accumulated Comprehensive Loss,												for the Three Months
	Net of Tax, as of												Ended September 30,
	September 30,			June 30,			September 30,			June 30,
Corresponding Debt	2004			2004			2003			2003			2004			2003
Revolving advance	($	292	)	($	170	)	($	734	)	($	925	)	($	122	)	$	191
Term loan notes		—			—			(39	)		(92	)		—			53

	($	292	)	($	170	)	($	773	)	($	1,017	)	($	122	)	$	244

A summary of comprehensive income (loss) for the three months ended September 30, 2004 and 2003 is presented below:


	Three Months Ended
	September 30,
	2004			2003
	(in thousands)
Net income	$	5,073		$	3,007
Other comprehensive income (loss):
Unrealized gain (loss) on hedging instruments before tax expense		(203	)		406
Tax benefit (expense)		81			(162	)

Unrealized gain (loss) on hedging instruments net of tax expense		(122	)		244

Comprehensive income	$	4,951		$	3,251

4. GOODWILL AND OTHER INTANGIBLE ASSETS

Acquisitions

The following table provides information concerning the acquisitions made during the three months ended September 30, 2004:


	For the Three Months Ended
	September 30, 2004
	(in thousands, except number of stores
	and number of transactions)
Number of stores acquired		23
Number of transactions		4
Amounts allocated to:
Goodwill	$	3,280
Covenants not to compete		230

Total intangibles costs		3,510
Property and equipment		339
Other assets		559

Total purchase price	$	4,408

Amortizable Intangible Assets

Covenants not to compete are as follows:


	September 30,			June 30,
	2004			2004
	(in thousands)
Covenants not to compete, at cost	$	2,534		$	2,304
Less – accumulated amortization		(1,341	)		(1,237	)

	$	1,193		$	1,067

Each of the covenants not to compete is amortized over the applicable period of the contract. The weighted-average amortization period is 4.7 years.

Amortization expense related to the covenants not to compete for the three months ended September 30, 2004 was $104,000. Total estimated remaining amortization expense for succeeding fiscal years assuming current balances and no new acquisitions are as follows:

Estimated Remaining Amortization Expense
for Covenants Not to Compete
(in thousands)


For the Nine
Months Ending June 30,		For the Year Ending June 30,
2005		2006		2007		2008		2009		2010		2011
$	266	$	254	$	189	$	185	$	176	$	98	$	25

Intangible Assets Not Subject to Amortization

Changes in the carrying value of goodwill for the three months ended September 30, 2004 are as follows:


	Three Months Ended
	September 30, 2004
	(in thousands)
Balance, beginning of the period	$	81,719
Goodwill from acquisitions		3,280

Balance, end of the period	$	84,999

There were no impairment losses for the three months ended September 30, 2004 or 2003.

5. SHORT-TERM LOANS

All of the short-term loan products or similar services, also known as payday loans, offered at our stores consist of either (1) short-term loans or deferred-deposit services made or entered into by us, (sometimes called “ACE Loans” in these notes), or (2) deferred-deposit loans or services, or Republic Loans, made or entered into by Republic Bank. As of September 30, 2004, we were offering ACE Loans in 567 of our owned stores, and Republic Bank was offering Republic Loans in 387 of our company-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, ACE Loans consist 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 deferred presentment date. The amount of the customer’s check or ACH authorization is the amount of the cash provided to the customer plus a fee to us. The term of the deferral of the check presentment or ACH debit is

typically two to four weeks. During the quarter ended September 30, 2004, the average amount of cash provided to a customer in such a transaction was $269, and the average fee to us was $39.89. As of September 30, 2004 and June 30, 2004, the gross receivable for our ACE Loans was approximately $30.8 million and $27.7 million, respectively.

The Republic Loans are offered and made at our owned stores in accordance with a Marketing and Servicing Agreement 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 our ACE Loans, though Republic Bank has sole discretion regarding the terms of the Republic Loans. As of September 30, 2004, 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 Republic Bank Agreement, Republic Bank pays us an agency fee for our services in marketing and servicing the Republic Loans at the stores and in collecting outstanding Republic Loans. We do not acquire or own any participation interest in any of the Republic Loans, but our fees are subject to reduction by the losses from uncollected Republic Loans. The maximum potential future payments that we could be obligated to make under the Republic Bank Agreement are the total outstanding Republic Loans recorded on Republic Bank’s financial statements, which were $10.0 million as of September 30, 2004 and $9.4 million as of June 30, 2004.

Loan fees and interest include our fees and interest received from customers of our ACE Loans, and our 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.

We have established a loan loss allowance regarding our economic interests in our ACE Loans. Our 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. Our policy is to charge off interests in all of our ACE 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. We establish a payable to Republic Bank to reflect our 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. Our policy in establishing the payable regarding Republic Loan losses is substantially the same as our policy regarding the loan loss allowance for our ACE loans.

Loans receivable, net, on the consolidated balance sheets as September 30, 2004 and June 30, 2004 were $18.8 million and $17.0 million, respectively, which includes receivables for our ACE Loans (but not regarding any Republic Loans, because we do not own any interest in those loans). The loan loss allowance of $12.0 million and $10.6 million as of September 30, 2004 and June 30, 2004, respectively, represented 39.0% and 38.3% of the gross loans receivable as of that date. Net loan charge-offs for the three months ended September 30, 2004 and 2003, were $3.7 million and $3.4 million, respectively.

ACE CASH EXPRESS, INC. AND SUBSIDIARIES
SUPPLEMENTAL STATISTICAL DATA

(unaudited)


	Three Months Ended
	September 30,						Year Ended June 30,
	2004			2003			2004			2003			2002
Company Operating and Statistical Data:
Company-owned stores in operation:
Beginning of period		1,026			968			968			1,003			988
Acquired		23			1			34			2			8
Opened		15			4			53			14			39
Sold		—			—			(5	)		(23	)		—
Closed		(9	)		(5	)		(24	)		(28	)		(32	)

End of period		1,055			968			1,026			968			1,003
Franchised stores in operation:
Beginning of period		204			200			200			184			175
Opened		9			7			32			26			22
Acquired by ACE		(11	)		(1	)		(13	)		(2	)		(8	)
Closed/Sold		—			—			(15	)		(8	)		(5	)

End of period		202			206			204			200			184

Total store network		1,257			1,174			1,230			1,168			1,187

Percentage increase (decrease) in comparable store revenues from prior period: ⁽¹⁾
Total revenue		7.9	%		(0.2	%)		5.0	%		1.9	%		17.2	%
Check fees excluding tax check fees		0.0	%		6.9	%		5.2	%		8.0	%		6.0	%
Loan fees and interest		20.7	%		(10.6	%)		7.8	%		(4.4	%)		36.1	%
Purchases of property and equipment, net (in thousands)	$	3,036		$	794		$	7,950		$	4,771		$	7,127
Intangible assets acquired (in thousands)		3,510			60			6,403			673			1,177
Check Cashing Data:
Face amount of checks cashed (in millions)	$	1,147		$	1,156		$	5,103		$	5,040		$	4,843
Face amount of average check	$	358		$	354		$	388		$	383		$	378
Average fee per check	$	8.78		$	8.47		$	9.91		$	9.65		$	9.36
Fees as a percentage of average check		2.45	%		2.39	%		2.55	%		2.52	%		2.48	%
Number of checks cashed (in thousands)		3,204			3,266			13,151			13,148			12,821
Check Collections Data:
Face amount of returned checks (in thousands)	$	5,952		$	5,353		$	21,705		$	24,087		$	23,637
Collections (in thousands)		4,041			3,356			13,947			16,935			16,090

Net write-offs (in thousands)	$	1,911		$	1,997		$	7,758		$	7,152		$	7,547

Collections as a percentage of returned checks		67.9	%		62.7	%		64.3	%		70.3	%		68.1	%
Net write-offs as a percentage of revenues		3.1	%		3.7	%		3.1	%		3.1	%		3.3	%
Net write-offs as a percentage of the face amount of checks cashed		0.17	%		0.17	%		0.15	%		0.14	%		0.16	%

ACE CASH EXPRESS, INC. AND SUBSIDIARIES
SUPPLEMENTAL STATISTICAL DATA, continued
(unaudited)
(in thousands, except averages and percents)


	Three Months Ended
	September 30,						Year Ended June 30,
	2004			2003			2004			2003			2002
Combined Short-Term Consumer Loans Operating Data:
Volume – new loans and refinances	$	159,673		$	126,911		$	527,723		$	484,026		$	502,013
Average advance	$	283		$	276		$	278		$	274		$	269
Average finance charge	$	44.83		$	43.54		$	43.71		$	44.55		$	45.61
Number of loan transactions – new loans and refinances		554			464			1,909			1,798			1,866
Matured loan volume	$	154,565		$	124,204		$	516,741		$	488,940		$	489,887
Loan fees and interest	$	23,223		$	18,455		$	77,029		$	70,806		$	74,197
Loan loss provision	$	7,424		$	6,486		$	24,280		$	22,293		$	21,924
Gross margin on loans		68.0	%		64.9	%		68.5	%		68.5	%		70.5	%
Loan loss provision as a percent of matured loan volume		4.8	%		5.2	%		4.7	%		4.6	%		4.5	%
ACE Loans: ⁽²⁾
Volume – new loans and refinances	$	111,219		$	86,412		$	368,031		$	420,129		$	502,013
Average advance	$	269		$	265		$	269		$	268		$	269
Average finance charge	$	39.89		$	38.99		$	39.40		$	42.71		$	45.61
Number of loan transactions – new loans and refinances		400			327			1,368			1,587			1,866
Matured loan volume	$	107,266		$	84,244		$	359,723		$	432,900		$	489,887
Loan fees and interest	$	15,960		$	12,296		$	52,993		$	61,769		$	74,197
Loan loss provision	$	5,087		$	4,540		$	16,890		$	19,361		$	21,924
Loans Processed for Republic Bank: ⁽³⁾
Volume - new loans and refinances	$	48,454		$	40,499		$	159,692		$	63,897		$	—
Average advance	$	314		$	295		$	296		$	302		$	—
Average finance charge	$	55.37		$	51.96		$	52.11		$	53.35		$	—
Number of loan transactions – new loans and refinances		154			137			541			211			—
Matured loan volume	$	47,299		$	39,960		$	157,018		$	56,040		$	—
Loan fees and interest	$	7,263		$	6,159		$	24,036		$	9,037		$	—
Provision for loan losses payable to Republic Bank	$	2,337		$	1,946		$	7,390		$	2,932		$	—
Balance Sheet Data (in thousands):
Gross loans receivable	$	30,819		$	24,090		$	27,663		$	21,734		$	29,569
Less: Allowance for losses on loans receivable		12,021			9,887			10,616			8,734			12,213

Loans receivable, net of allowance	$	18,798		$	14,203		$	17,047		$	13,000		$	17,356

Allowance for losses on loans receivable:
Beginning of period	$	10,616		$	8,734		$	8,734		$	12,213		$	13,382
Provision for loan losses		5,087			4,540			16,890			19,361			21,924
Charge-offs		(3,833	)		(3,459	)		(15,295	)		(23,729	)		(24,519	)
Recoveries		151			72			287			889			1,426

End of period	$	12,021		$	9,887		$	10,616		$	8,734		$	12,213

Allowance as a percent of gross loans receivable		39.0	%		41.0	%		38.3	%		40.2	%		41.3	%

(1) Calculated based on changes in revenue for all company-owned stores open in both periods and open for at least 13 months.

(2) Operating data for ACE loans include short-term consumer loans made by Goleta National Bank at our company-owned stores until we discontinued offering Goleta loans on December 31, 2002.

(3) Republic Bank loans are short-term consumer loans made by Republic Bank & Trust Company at our company-owned stores in Arkansas, Pennsylvania and Texas since January 1, 2003.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Overview

We are a leading retailer of financial services, including check cashing, short-term consumer loan and bill payment services. As of September 30, 2004, we had a total network of 1,257 stores in 37 states and the District of Columbia, consisting of 1,055 company-owned stores and 202 franchised stores. This makes us the largest owner, operator and franchisor of check cashing stores in the United States and one of the largest providers of short-term consumer loans, also known as payday loans. We focus on serving unbanked and underbanked consumers, many of whom seek alternatives to traditional banking relationships in order to gain convenient and immediate access to check cashing services and payday loans. We seek to develop and maintain the largest network of stores in each of the markets where we operate. Our growth strategy is to open new stores, franchise stores in new and existing markets, opportunistically acquire stores, increase our customer base and introduce new services into our store network.

Our stores offer check cashing, loans and other retail financial services at competitive rates in clean settings during hours convenient for our customers. Our stores are located in highly visible, accessible locations, usually in strip shopping centers, free-standing buildings and kiosks located inside retail stores.

For our check cashing services, we charge our customers fees that are usually equal to a percentage of the amount of the check being cashed and are deducted from the cash provided to the customer. For our short-term consumer loans (“ACE Loans”), we receive interest on the loans. For the Republic Bank loans (“Republic Loans”), we receive origination and servicing fees from Republic Bank.

Our expenses primarily relate to the operations of our stores, including salaries and benefits for our employees, occupancy expense for our leased real estate, security expenses, returns and cash shortages, loan loss provisions, depreciation of our assets and corporate and other expenses, including costs related to store openings and closings.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from our estimates. We believe our application of accounting policies, and the estimates inherently required therein, are reasonable.

Revenue Recognition. Approximately 97% of our revenue results from transactions at the point-of-sale with our customers and approximately 66% of our revenue is 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 services grouped in “other fees.” We act in an agency capacity regarding some of the services offered and sold at our stores and therefore record as revenue the amounts received from customers less amounts remitted to the provider.

For ACE Loans that we make and for the Republic Loans for which we act only as marketing agent and servicer for a fee from the lender, revenue constituting loan fees and interest (whether paid by the customer or the lender) is recognized ratably over the term of each loan, which is generally 14 days.

leasehold improvements have been completed, the proprietary point-of-sale system has been installed and the store has been opened. Franchise royalty fees, which are based on a percentage of each franchisee’s revenues, are recognized and payable monthly.

Loan Loss Provision. We believe that the most significant estimate made in the preparation of the accompanying consolidated financial statements relates to the determination of our allowance for loan losses. We maintain an allowance for loan losses and a payable to Republic Bank at levels we consider sufficient to cover the anticipated losses in the collection of our ACE Loan portfolio and our liability for Republic Loan losses. The allowance for loan losses and our payable to Republic Bank are determined based upon a review of historical and recent loan losses and the loan portfolio. Management periodically reviews the allowance for loan losses and payable to republic Bank, and any changes are reflected in current operations. Actual loan losses may be materially different from the recorded allowance for loan losses or recorded amount payable to Republic Bank.

Summary of Quarterly Results

Our fiscal 2005 first quarter total revenue was approximately $6.3 million, or 11.4%, higher than our fiscal 2004 first quarter total revenue. This increase resulted primarily from an approximate $4.8 million, or 25.8%, increase in loan-related revenue and an approximate $0.9 million, or 22.7%, increase in bill-payment (including debit card) revenue. Comparable store revenue increased 7.9% in the first quarter of fiscal 2005 from the first quarter of fiscal 2004. Our fiscal 2005 first quarter net income was approximately $5.1 million, with diluted earnings per share of $0.37, compared to our fiscal 2004 first quarter net income of approximately $3.0 million, with diluted earnings per share of $0.28.

Results of Operations

Revenue Analysis


	Three Months Ended September 30,
	2004		2003		Increase (Decrease)						2004			2003
	(in thousands)							(percent)			(percentage of revenue)
Check cashing	$	28,117	$	27,661	$	456			1.6	%		45.3	%		49.7	%
Short-term consumer loans		23,223		18,455		4,768			25.8			37.4			33.1
Bill payments		4,709		3,839		870			22.7			7.6			6.9
Money transfers		2,825		2,756		69			2.5			4.6			4.9
Money orders		1,731		1,593		138			8.7			2.8			2.9
Franchising		747		597		150			25.1			1.2			1.1
Other services		674		800		(126	)		(15.8	)		1.1			1.4

Total revenue	$	62,026	$	55,701	$	6,325			11.4	%		100.0	%		100.0	%

Average revenue per store (excluding franchise revenues)	$	58.9	$	56.9

Most of the growth in total revenue in the first quarter of fiscal 2005 from the first quarter of fiscal 2004 resulted from increases in short-term consumer loan fees and interest and bill-payment (including debit card) fees. Comparable store revenue increased by $4.1 million, or 7.9%.

Check cashing fees in the first quarter of fiscal 2005 increased from the first quarter of the fiscal 2004 because of a 3.6% increase in the average check fee, a 1.1% increase in the face amount of the average check cashed, offset by a 1.9% decrease in the number of checks cashed. Check cashing fees, excluding tax check fees, increased 3.4 percent from the first quarter of fiscal 2004. Comparable store check cashing fees, excluding tax check fees, were flat compared to the same period last year.

Loan fees and interest for the first quarter of fiscal 2005 increased by $4.8 million, or 25.8%, from the first quarter of fiscal 2004 due to the 20.7% increase in comparable store loan fees and the increased number of store locations offering loan services. As of September 30, 2004, we offered loan services in 954 of our company-owned stores, compared to 862 company-owned stores as of September 30, 2003.

Bill payment services revenue for the first quarter of fiscal 2005 increased from the first quarter of fiscal 2004 because of the growth in fees from sales of third-party prepaid debit cards and the addition of vendors for which payments are accepted. During the first quarter of fiscal 2005, we sold approximately 50,000 prepaid debit cards compared to 37,000 prepaid debit cards for the same period last year, a 35% increase. Customers loaded $77 million on these cards during the first quarter of fiscal 2005, compared to $56 million during the same period last year.

Store and SSM Expense Analysis


	Three Months Ended September 30,
	2004		2003		Increase (Decrease)						2004			2003
	(in thousands)							(percent)			(percentage of revenue)
Salaries and benefits	$	14,787	$	14,255	$	532			3.7	%		23.8	%		25.6	%
Occupancy		8,182		7,249		933			12.9			13.2			13.0
Provision for loan losses and doubtful accounts		7,468		6,351		1,117			17.6			12.0			11.4
Depreciation		1,687		1,737		(50	)		(2.9	)		2.7			3.1
Other:
Armored and security		1,943		1,780		163			9.2			3.1			3.2
Returns and cash shortages		2,401		2,401		—			—			3.9			4.3
Information services		865		752		113			15.0			1.4			1.4
Bank charges		1,271		1,263		8			0.6			2.0			2.3
Store supplies		1,233		884		349			39.5			2.0			1.6
Telecommunications		603		550		53			9.6			1.0			1.0
Advertising and marketing		678		343		335			97.7			1.1			0.6
Miscellaneous		814		804		10			1.2			1.3			1.4

Other		9,808		8,777		1,031			11.7			15.8			15.8

Total store and SSM expenses	$	41,932	$	38,369	$	3,563			9.3	%		67.6	%		68.9	%

Average per store expense (including SSM expenses)	$	40.3	$	39.6
Average per store gross margin (including SSM expenses)	$	19.3	$	17.9

Total store and self-service machine (“SSM”) expenses increased primarily as a result of the 87 additional stores in operation and growth in the loan business.

Salaries and benefits, occupancy, armored and security, information services, store supplies and telecommunications expenses, combined, increased primarily as a result of the 9% increase in store count from the same period last year. Provision for loan losses increased due to growth in both the ACE Loan and Republic Loan business, offset by a decrease in the provision rate. Depreciation expenses decreased slightly as a result of the prior year write-off and subsequent upgrade of store signage. Returned checks, net of collections, and cash shortages remained flat, but decreased as a percentage of revenue due to continued focus on operational procedures and controls. Advertising and marketing expenses increased due to specific advertising and marketing programs introduced this fiscal year.

Other Expenses Analysis


	Three Months Ended September 30,
	2004		2003		Increase (Decrease)						2004			2003
	(in thousands)							(percent)			(percentage of revenue)
Region expenses	$	5,219	$	4,477	$	742			16.6	%		8.4	%		8.0	%
Headquarters expenses		4,681		4,313		368			8.5			7.5			7.7
Franchise expenses		267		263		4			1.5			0.4			0.5
Other depreciation and amortization		706		1,017		(311	)		(30.6	)		1.1			1.8
Interest expense, net		593		2,235		(1,642	)		(73.5	)		1.0			4.0
Other (income) expenses, net		172		16		156			975.0			0.3			0.0
Income taxes		3,383		2,004		1,379			68.8			5.5			3.6

Region Expenses. Region expenses increased because of the addition of a new region and increases in salaries and benefits expense resulting from additional staffing in collections, facilities and real estate development related to supporting the growth in the number of stores.

Headquarters Expenses. Headquarters expenses increased primarily due to charges related to restricted stock granted under our 1997 Stock Incentive Plan.

Franchise Expenses. Franchise expenses relate to the salaries, benefits, and other franchisee support costs for the sales and support personnel in our ACE Franchise Group. Franchise expenses remained unchanged from the first quarter last year.

Other Depreciation and Amortization. Other depreciation and amortization decreased due to the lower level of debt financing costs under our current bank credit agreement.

Interest Expense, Net. Interest expense, net, decreased because of the repayment of the term loan during the fourth quarter of fiscal 2004 and lower average revolving advance balances.

Other (Income) Expenses, Net. Other (income) expenses, net increased due to a combination of more store closings during the first quarter of fiscal 2005 and a gain on sale of stores in the first quarter of fiscal 2004.

Income Taxes. A total of $3.4 million was provided for income taxes, an increase of $1.4 million from $2.0 million in the first quarter of fiscal 2004. The provision for income taxes was calculated based on a statutory federal income tax rate of 34%, plus a provision for state income taxes. The effective income tax rate for the first quarter of fiscal 2005 of 40% remained unchanged from the first quarter last year.

Balance Sheet Variations

Cash and cash equivalents, money orders payable and revolving advances vary because of seasonal and day-to-day requirements resulting primarily from maintaining cash for cashing checks and making small consumer loans, and the receipt and remittance of cash from the sale of money orders, wire transfers and bill payments. For the three months ended September 30, 2004, cash and cash equivalents decreased $19.0 million, compared to a decrease of $14.9 million for the three months ended September 30, 2003.

Accounts receivable, net, of $5.2 million as of September 30, 2004 decreased $0.3 million from June 30, 2004.

Loans receivable, net, of $18.8 million as of September 30, 2004 increased $1.8 million from June 30, 2004 due to the increased volume of ACE Loans. Loans receivable, net, does not include any of the Republic Loans available through our company-owned stores in Arkansas, Pennsylvania and Texas, because we serve only as marketing and servicing agent for Republic Bank regarding those Republic Loans and do not acquire or own any participation interest in any of those loans. Our agreement with Republic Bank provides for us to receive agency fees from Republic Bank, though such fees are subject to reduction or offset by the losses from uncollected Republic Loans.

Prepaid expenses, inventories and other current assets of $11.3 million as of September 30, 2004 increased $0.7 million from June 30, 2004 due primarily to increases in prepaid insurance expenses.

Property and equipment, net, at September 30, 2004 increased $0.2 million from June 30, 2004 as a result of fixed asset additions of $3.0 million (including $0.1 million for capitalized software development), offset by depreciation expense of $2.0 million and fixed asset retirements of $0.8 million. Goodwill, net, at September 30, 2004 increased $3.3 million from June 30, 2004 as a result of the 23 stores acquired during the three months ended September 30, 2004. During the three months ended September 30, 2004, we opened 15 newly constructed stores, acquired 23 stores, and closed nine company-owned stores.

Other assets at September 30, 2004 increased by $1.9 million as a result of an increase in deferred financing costs related to the July 30, 2004 amendment to our bank credit agreement.

Revolving advances at September 30, 2004 decreased by $17.6 million from June 30, 2004 due to reduced average daily usage of the primary revolving credit facility, which in turn resulted from continued improvements in cash forecasting and operational procedures regarding store cash deliveries along with the use of the net proceeds from our sale of common stock during the fourth quarter of fiscal 2004.

Accounts payable, accrued liabilities and other current liabilities at September 30, 2004 decreased $0.4 million from June 30, 2003, primarily because of reductions in liabilities to various service providers.

Loan Portfolio

We have established a loan loss allowance regarding our ACE Loans receivable at a level that our management believes to be adequate to absorb known or probable losses from ACE Loans made by us. Our policy for determining the loan loss allowance is based on historical 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.

We have determined, based on recent operating history, that we receive payment of approximately 94.8% (for loans maturing in the first, second and fourth fiscal quarters) or 95.7% (for loans maturing during tax refund season in the third fiscal quarter) of the loan volume, or principal amount of the loans. Therefore, the loan loss allowance is approximately 5.2% of the principal amount of the loans maturing in the first, second and fourth fiscal quarters and approximately 4.3% of the principal amount of the loans maturing in the third fiscal quarter. Our policy is to charge off all of our short-term consumer loans, which are 180 days or more past due or delinquent. Charge-offs are applied as a reduction to the loan loss allowance and any recoveries of previously charged-off loans are applied as an increase to the loan loss allowance.

At the end of each fiscal quarter, we analyze the loan loss provision and the allowance that has been computed based on the activity described above to determine if the allowance is adequate based on our understanding of what is occurring in the stores with customers, past loan loss experience, current economic conditions, volume and growth of the loan portfolio, timing of maturity, as well as collections experience. For this purpose, we treat each renewal of a loan in which no additional principal is advanced as a continuation of the initial loan. If necessary, we make adjustments to the provision and the allowance.

An analysis of the loan loss allowance with reference to our gross loans receivable (which does not include any Republic Loans) is as follows:


	Three Months Ended
	September 30,
	2004			2003
	(in thousands)
Gross loans receivable	$	30,819		$	24,090
Less: Allowance for losses on loans receivable		12,021			9,887

Loans receivable, net of allowance	$	18,798		$	14,203

Allowance for losses on loans receivable:
Beginning of period	$	10,616		$	8,734
Provision for loan losses		5,087			4,540
Charge-offs		(3,833	)		(3,459	)
Recoveries		151			72

End of period	$	12,021		$	9,887

Net loan charge-offs as a percent of volume		3.3	%		3.9	%
Allowance as a percent of gross loans receivable		39.0	%		41.0	%

The schedule below indicates the progression of receipts or collections of each “quarterly portfolio” of loans, consisting of our ACE Loans. In this case, a “quarterly portfolio” is our interests in all of the ACE Loans that matured in a particular fiscal quarter. We can track the payment rates at different points of time for each quarterly portfolio.

We have established the following new targets regarding each quarterly portfolio for fiscal 2005:

• Receive or collect 91.5% (or 93.0% in our third fiscal quarter) of the total volume, or principal amount of loans, by the end of the current quarter.

• Receive or collect a cumulative 93.2% (or 94.8% in our third fiscal quarter) by 90 days out.

• Receive or collect a cumulative 94.8% (or 95.7% in our third fiscal quarter) by 180 days out. We charge-off our ACE Loans when they become delinquent for 180 days.

The assumed higher rate of payment in our third fiscal quarter is a result of improved collections during the annual tax season because of borrowers’ receipt of tax refunds.

Collection Progression for Quarterly Loan Portfolios


		Collection Percentage
		New			Actual			Prior			Actual
Days Following Quarter		Target			Fiscal 2005			Target			Fiscal 2004			Fiscal 2003
		First Quarter
	30		91.5	%		93.0	%		91.0	%		92.8	%		92.4	%
	90		93.2	%					92.9	%		94.9	%		94.7	%
	180		94.8	%					94.5	%		95.1	%		95.1	%
		Second Quarter
	30		91.5	%					91.0	%		93.9	%		93.1	%
	90		93.2	%					92.9	%		95.6	%		95.9	%
	180		94.8	%					94.5	%		95.8	%		96.1	%
		Third Quarter
	30		93.0	%					93.0	%		94.7	%		93.5	%
	90		94.8	%					94.5	%		96.0	%		95.9	%
	180		95.7	%					95.5	%		96.1	%		96.1	%
		Fourth Quarter
	30		91.5	%					91.0	%		93.2	%		93.4	%
	90		93.2	%					92.9	%		94.7	%		95.4	%
	180		94.8	%					94.5	%		—			95.6	%

Off-Balance Sheet Arrangement with Republic Bank

We are party to a marketing and servicing agreement with Republic Bank. Under this agreement, we provide various services to Republic Bank in connection with our marketing and servicing of Republic Loans in exchange for which we are paid fees by Republic Bank. We also earn additional fees if Republic Bank’s quarterly loan loss rate for these Republic Loans is below specified levels. As of September 30, 2004, Republic Bank was offering Republic Loans in 387 of our company-owned stores in Arkansas, Pennsylvania and Texas. Approximately $7.3 million, or 11.7% of our total revenues in the quarter ended September 30, 2004 were fees paid to us by Republic Bank.

Although we market and service these Republic Loans, Republic Bank is responsible for reviewing each loan application and determining whether such application is approved for a loan. We are not involved in the loan approval process, including with respect to determining the loan approval procedures or criteria, nor do we acquire or own any participation interest in these loans. Consequently, Republic Loans are not included in our loan portfolio or in our loans receivable and are not reflected on our balance sheet. Under our agreement, however, we are obligated to reimburse Republic Bank by paying it an amount equal to the net amount charged off by Republic Bank, less Republic Bank’s established reserves. Therefore, we could be obligated to pay Republic Bank for loan losses in

an amount up to the total outstanding amount of Republic Loans recorded on Republic Bank’s financial statements, which was $10.0 million as of September 30, 2004.

Because of our economic exposure for losses related to the Republic Loans, we have established a payable to reflect our anticipated losses related to uncollected Republic Loans that are 180 days or more past due. We believe that the loss experience with Republic Loans will be similar to the loss experience with those other loans. Accordingly, the payable for amounts due to Republic Bank for losses regarding Republic Loans has been established at a level similar to the loan loss allowance for our other loan services. We cannot assure you, however, that our estimates will be accurate, and if the Republic Loan losses are materially greater than our recorded amount payable to Republic Bank, our financial condition could be materially adversely affected.

For the three months ended September 30, 2004, we provided approximately $2.3 million for losses on Republic Loans and charged-off $1.5 million related to these loans. The balance of the liability for Republic Loan losses reported in accrued liabilities as of September 30, 2004 was $0.2 million.

Liquidity and Capital Resources

Cash Flows from Operating Activities

During the three months ended September 30, 2004 and 2003, net cash provided by operating activities was $3.8 million and $3.1 million, respectively. The increase in cash flows from operating activities resulted from increased net income, timing of remittances to product or service providers, such as Republic Bank, MoneyGram Payment Systems, Inc., and Travelers Express Company Inc., offset by growth in loans receivable.

Cash Flows from Investing Activities

During the three months ended September 30, 2004 and 2003, net cash used by investing activities was $6.5 million and $0.9 million, respectively. We used $3.0 million and $0.8 million during the three months ended September 30, 2004 and 2003, respectively, for purchases of property and equipment related principally to new store openings and remodeling existing stores. Expenditures related to store acquisitions were $3.5 million and $0.1 million for the three months ended September 30, 2004 and 2003, respectively.

Cash Flows from Financing Activities

Net cash used by financing activities for the three months ended September 30, 2004 and 2003 was $16.2 million and $17.1 million, respectively. During the three months ended September 30, 2004, we repaid $17.6 million of our revolving advances due to continued improvements in daily cash requirements forecasting and proceeds from our recent common stock offering. Money orders payable increased by $0.6 million from June 30, 2004. We received $0.8 million from the exercise of stock options for the three months ended September 30, 2004.

Certain Contractual Cash Commitments

The table below summarizes our cash obligations for certain leases and acquisition notes payable outstanding as of September 30, 2004:


			Payments Due by June 30,
									2008 and
	Total		2005		2006		2007		thereafter
	(In thousands)
Operating leases	$	46,164	$	15,116	$	14,964	$	9,414	$	6,670
Acquisition notes payable		111		34		37		40		—

Total	$	46,275	$	15,150	$	15,001	$	9,454	$	6,670

As part of our growth strategy, we intend to open new stores in existing and new markets. During the first quarter of fiscal 2005, we opened 15 new company-owned stores, and we anticipate opening an additional 45 company-

owned stores by the end of fiscal 2005, resulting in an anticipated net gain of approximately 40 to 45 company-owned stores in fiscal 2005 after store dispositions and closings.

The capital cost of opening a new store varies depending on the size and type of store, but is typically in the range of $65,000 to $75,000. This capital cost includes leasehold improvements, signage, computer equipment and security systems. MoneyGram Payment Systems, Inc. pays us a cash incentive for each new location opened, which is accounted for as deferred revenue that is recognized over the remaining life of the MoneyGram Agreement. In addition, the typical ACE Cash Express company-owned store requires working capital of $80,000 to $100,000 to fund operating cash and the store’s loan portfolio.

Our total capital expenditures, excluding acquisitions, are anticipated to be approximately $15.0 million during our fiscal year ending June 30, 2005, in connection with the opening of 60 new company-owned stores, the opening of 25 ACE Cash Advance stores, the relocation or remodeling of certain existing stores, maintenance, and ongoing upgrades of our information system. The actual amount of capital expenditures will depend in part on the number of new stores opened, the number of stores acquired, and the number of existing stores that are relocated or remodeled. We believe that our existing resources, anticipated cash flows from operations, and credit facilities will be sufficient to finance our anticipated capital expenditures and operational requirements during fiscal 2005. The 60 new ACE Cash Express company-owned stores and the 25 new ACE Cash Advance stores, including the 15 stores already opened, and after closings and dispositions, will require approximately $4.0 million of working capital to fund operating cash and additions to our loan portfolio.

Credit Facilities

Our credit facilities are provided under a First Amended and Restated Credit Agreement with a syndicate of banks led by Wells Fargo Bank, National Association, as administrative agent for itself and the other lenders thereunder. The amended credit agreement, which we entered into on July 30, 2004, amended and restated the credit agreement that we originally entered into on March 31, 2003.

The amended credit agreement provides two revolving line-of-credit facilities that expire June 30, 2008:

•
a $140 million primary revolving credit facility that is available throughout the four-year term; and

•
a $60 million seasonal revolving credit facility that is available during each calendar-year-end holiday and tax season (i.e., December 15 through March 15) during the four-year term.

The revolving line-of-credit facilities include, subject to certain conditions, a letter-of-credit facility from Wells Fargo Bank of up to $10 million.

Borrowings under the amended credit agreement bear interest at a variable annual rate equal to, at our discretion, either:

• The sum of (a) the greatest of (i) the prime rate publicly announced by Wells Fargo Bank, (ii) one percent plus the rate of interest on the secondary market for three-month certificates of deposit reported by the Board of Governors of the Federal Reserve System (the “Board of Governors”), multiplied by a fraction, the numerator of which is one and the denominator of which is one minus the maximum reserve percentages required by the Board of Governors to which Wells Fargo Bank is subject for new negotiable nonpersonal time deposits in dollars of over $100,000 with maturities of approximately three months plus the annual assessment rate that is payable by a member of the Bank Insurance Fund classified as “well capitalized,” and (iii) the federal funds rate plus 0.5%; plus (b) a margin that varies from 1.25% to 2.25% per annum based on our debt-to- EBITDA ratio. (For this ratio, “EBITDA” is our earnings before interest, taxes, depreciation, and amortization.) This interest rate adjusts on a daily basis.

• The sum of (a) the London Interbank Offered Rate (“LIBOR”) for (at our discretion) one-, two-, three- or six-month maturities, multiplied by a fraction, the numerator of which is one and the denominator of which is one minus the maximum reserve percentages required by the Board of Governors to which Wells Fargo Bank is subject for Eurocurrency funding, plus (b) a margin that varies from 2.25% to 3.25% per annum

based on our debt-to-EBITDA ratio. This interest rate adjusts, at our discretion, at one-, two-, three-, or six-month intervals, in accordance with the corresponding LIBOR.

• The sum of (a) LIBOR for one-month maturities, plus (b) a margin that varies from 2.25% to 3.25% per annum based on our debt-to-EBITDA ratio. This interest rate adjusts on a daily basis.

We have selected the third alternative described above as the annual interest rate for our current borrowings, and as of the end of September 2004, that interest rate was calculated using LIBOR plus 2.25%. Upon an event of default under the amended credit agreement, the applicable annual interest rate is increased by three hundred basis points.

Interest on the outstanding principal amount borrowed under the amended credit agreement is payable monthly. The outstanding principal amount borrowed and all interest accrued under the primary revolving line-of-credit facility is payable on June 30, 2008. The outstanding principal amount and all interest accrued under the seasonal revolving line-of-credit facility is payable on March 15 of each year. At the end of each fiscal quarter, beginning September 30, 2004, we must pay the lenders a commitment fee equal to 0.5% per annum of the average daily unused portion of the credit available under the amended credit agreement (which is the unused portion of the $140 million throughout the year and the unused portion of the $60 million seasonal facility from December 15 through March 15 each year). We must also pay Wells Fargo Bank an annual agency fee of $60,000 in advance on each July 30. We paid $1.2 million in arrangement fees and up-front fees relating to the amended credit agreement. We may (a) at any time reduce, in whole or in part (in $5 million increments), the available amount of the credit facilities provided in the amended credit agreement and (b) subject to certain conditions, prepay, in whole or in part, the revolving credit facilities provided by the amended credit agreement without penalty or premium.

The amended credit agreement may be terminated before the stated expiration or maturity date of the revolving credit facilities — requiring all unpaid principal and accrued interest to be paid to the lenders — upon any “event of default” as defined in the amended credit agreement. The events of default in the amended credit agreement include (a) nonpayment of amounts due under the amended credit agreement, (b) the failure to observe or perform covenants set forth in the amended credit agreement and in the documents ancillary thereto that are not cured, (c) a change in control of us, and (d) any event or circumstance that has a material adverse effect on the collateral secured under the amended credit agreement or on our business, assets, liabilities, condition (financial or otherwise), or prospects.

We are subject to various restrictive covenants stated in the amended credit agreement. Those restrictive covenants, which are typical of those found in credit agreements of these types, include restrictions on the incurrence of indebtedness from other sources, restrictions on advances to or investments in other persons or entities, restrictions on the payment of dividends to shareholders and on the repurchase of shares, and the requirement that various financial ratios be maintained. Certain of the covenants in the amended credit agreement require us:

• to limit our capital expenditures during each fiscal year to $20 million;

• to limit any single acquisition of assets or capital stock of an entity in the retail financial services business to a purchase price of no more than $10 million and to assets or entities that have a positive cash flow for the 12 months preceding such acquisition, unless otherwise agreed upon by the lenders;

• to reduce our risk of increases in interest rates by entering into one or more interest-rate swap agreements to convert to fixed-rate obligations our floating- or variable-rate interest obligations with respect to the lesser of (a) $30 million and (b) 50% of the average amount of the unpaid loans outstanding during the prior month; and

• to maintain the following financial coverage ratios:

- our consolidated net worth at any time cannot be less than $133.7 million plus 75% of all net income earned in a calendar quarter, without deduction for any quarterly losses, plus 100% of the proceeds of any equity offering;

- at the end of any fiscal quarter, our debt-to-EBITDA ratio cannot be more than 2.75-to-1.00 through December 31, 2005 and 2.50-to-1.00 thereafter;

- at the end of each fiscal quarter, our cash flow coverage ratio cannot be less than 1.25-to-1.00.

The payment and performance of our obligations under the amended credit agreement and the documents ancillary thereto are secured by liens on all or substantially all of our and its subsidiaries’ assets (other than Ace Funding, LLC’s, our wholly-owned consolidated subsidiary responsible for borrowings related specifically to funds utilized by self-service machines during tax season). All of our subsidiaries (other than Ace Funding, LLC) guaranteed our obligations under the amended credit agreement. The collateral arrangements entered into by us and our guarantor subsidiaries are substantially similar for each of Wells Fargo Bank, as administrative agent for the lenders, and Travelers Express Company, Inc., which has a subordinate lien to secure the payment and performance of our obligations under a money order agreement and under the MoneyGram Agreement. We and all of our secured creditors or agents for them entered into a First Amended and Restated Intercreditor Agreement dated as of July 30, 2004 that includes agreements regarding the priority of distributions to the lenders and Travelers Express upon foreclosure and liquidation of the collateral subject to the security agreements executed by us and our guarantor subsidiaries and certain other intercreditor arrangements. This intercreditor agreement replaced the Intercreditor Agreement dated as of March 31, 2003, as amended, that was in effect with our prior credit agreement.

Swap Agreements

To reduce our risk of greater interest expense because of interest-rate fluctuations, we enter into interest-rate swap agreements from time to time, which effectively convert a portion of our floating-rate interest obligations to fixed-rate interest obligations.

On April 23, 2003, we entered into an interest-rate swap agreement with JP Morgan Chase Bank, regarding a notional amount of $60 million, associated with the revolving advance facility under our bank credit agreement, to be effective until March 31, 2006. On May 31, 2004, the notional amount was reduced from $60 million to $30 million and will increase to $45 million on January 1, 2005. The fixed rate effective on September 30, 2004, prior to adding the applicable margin, was 2.965%.

Effects of Financing Arrangements

We believe that our long-term credit facilities under the amended credit agreement, our funding arrangements for the self-service machines in H&R Block offices during the tax season and our anticipated cash flows from operations will provide adequate working capital for our operations. Although the amended credit agreement places restrictions on capital expenditures and acquisitions, we believe that these restrictions do not prohibit us from pursuing our growth strategy as currently planned.

Stock Repurchase Program

In fiscal 2000, our board of directors authorized the repurchase from time to time of up to approximately $5 million of our common stock in the open market or in negotiated transactions. During fiscal 2000 and 2001, we repurchased 211,400 shares at an average price of $12.81 per share. During fiscal 2002, 2003 and 2004 and the first quarter of fiscal 2005, no shares were repurchased. This stock repurchase program will remain in effect, however, until discontinued by our board of directors.

Litigation Expenses

We have been required in the past to defend ourselves and, in some matters, our directors, officers and others in various lawsuits and state regulatory proceedings regarding our current and past loan-related activities. We incurred significant legal expenses in conducting that defense. In accordance with our bylaws, we paid the expenses of defense for our directors, officers and other employees named as additional defendants in these lawsuits.

Critical Estimates, Uncertainties or Assessments in the Financial Statements

The preparation of our financial statements in conformity with generally accepted accounting principles in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of

revenues and expenses during the reporting period. In applying the accounting principles, we must often make individual estimates and assumptions regarding expected outcomes or uncertainties. As might be expected, the actual results or outcomes are generally different than the estimated or assumed amounts. These differences are usually minor and are included in our consolidated financial statements as soon as they are known. Estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

Actual results related to the estimates and assumptions made in preparing our consolidated financial statements will emerge over periods of time, such as estimates and assumptions underlying the determination of allowance for loan losses and self-insurance liabilities. These estimates and assumptions are monitored and periodically adjusted as circumstances warrant. For instance, our liability for self-insurance related to workers’ compensation, general liability and medical liability may be adjusted based on higher or lower actual loss experience. Although there is greater risk with respect to the accuracy of these estimates and assumptions because of the period over which actual results may emerge, such risk is mitigated by the ability to make changes to these estimates and assumptions over the same period.

We periodically review the carrying value of goodwill and other intangible assets when events and circumstances warrant such a review. One of the methods used for this review is performed using estimates of future cash flows. If the carrying value of goodwill or other intangible assets is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the goodwill or intangible assets exceeds its fair value. We believe that the estimates of future cash flows and fair value are reasonable. Changes in estimates of such cash flows and fair value, however, could affect the evaluation.

Based on an assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our consolidated financial statements provide a meaningful and fair perspective of us. We do not suggest that other risk factors, such as those discussed elsewhere in this report as well as changes in growth objectives, could not adversely impact our consolidated financial position, results of operations and cash flows in future periods.

Seasonality

Our business is seasonal to the extent of the impact of cashing tax refund checks and tax refund anticipation loan checks. The impact of these services is in the third and fourth quarters of our fiscal year. Our loan-related business declines in the third fiscal quarter as a result of the customers’ receipt of tax refund checks and tax refund anticipation loans.

Impact of Inflation

We believe our results of operations are not dependent upon the levels of inflation.

Forward-looking Statements

This Report contains, and from time to time we or certain of our representatives may make, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are generally identified by the use of words such as “anticipate,” “expect,” “estimate,” “believe,” “intend,” “plan,” “should,” “would,” and terms with similar meanings.

Although we believe that the current views and expectations reflected in these forward-looking statements are reasonable, those views and expectations, and the related statements, are inherently subject to risks, uncertainties, and other factors, many of which are not under our control and may not even be predictable. Those risks, uncertainties, and other factors could cause the actual results to differ materially from these in the forward-looking statements. Those factors are described under “Risk Factors” below.

We expressly disclaim any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in our views or expectations, or otherwise. We make no prediction or statement about the performance of our common stock.

Risk Factors

Our current business and future results may be affected by a number of risks and uncertainties, including those described below. The risks and uncertainties described below are not the only risks and uncertainties we face. Additional risks and uncertainties not currently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, results of operations and financial condition could suffer. The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements.

Risks Related to Our Business

We have significant existing debt and the restrictive covenants under our debt agreements may limit our ability to expand or pursue our business strategy. In addition, if we are forced to pay some or all of this debt following an event of default, our financial condition and results of operations would be severely and adversely affected.

Our business requires significant amounts of cash for services and inventory. Much of that cash is obtained through borrowing. Therefore, we have, and we expect to have, a significant amount of outstanding debt and may incur additional debt in the future as we seek to expand our business. As of September 30, 2004, our short-term debt was $42.4 million, and we had no material long-term debt.

Our debt agreements require us to maintain compliance with numerous financial covenants. The covenants restrict our ability to take certain actions to some extent, including our ability to:

• incur additional indebtedness;

• pay dividends and make distributions in respect of our capital stock;

• repurchase our capital stock;

• make capital expenditures;

• make investments or other restricted payments;

• engage in transactions with shareholders and affiliates;

• create liens;

• sell or otherwise dispose of assets;

• make payments on our debt, other than in the ordinary course; and

• engage in mergers and acquisitions.

As long as our indebtedness remains outstanding, the restrictive covenants could impair our ability to expand or pursue our growth strategy. In addition, the breach of any covenants or any payment obligations in any of these debt agreements will result in an event of default under the applicable debt instrument. If there is an event of default under one of our debt agreements, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable, subject to applicable grace periods. This could trigger cross-defaults under our other debt agreements. We cannot assure you that our assets or cash flow would be sufficient to repay fully borrowings under our outstanding debt agreements if accelerated upon an event of default, or that we would be able to refinance

or restructure the payments on any of those debt agreements. Further, if we are unable to repay, refinance or restructure our indebtedness under our secured debt agreements, the lenders under such agreements could proceed against the collateral securing that indebtedness. Substantially all of our assets are pledged to secure the outstanding indebtedness. Forced repayment of some or all of our indebtedness would reduce our available cash and have an adverse impact on our financial condition and results of operations.

Our existing and future debt obligations could adversely affect our results of operations and financial condition as we may be required to secure additional financing to meet our future capital needs and cannot assure you that we will be able to do so on favorable terms, if at all.

Our significant amount of debt could have important consequences. For example, it could:

• make it more difficult for us to satisfy our obligations to the holders of our outstanding debt;

• make us vulnerable to interest rate increases, because a significant portion of our borrowings is, and will continue to be, at variable rates of interest;

• require us to dedicate a substantial portion of our cash flow from operations to payments on our debt obligations, which will reduce our funds available for working capital, capital expenditures and other general corporate expenses;

• limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

• place us at a disadvantage compared to our competitors that have proportionately less debt;

• restrict our operational flexibility, because of restrictive covenants that will limit our ability to make acquisitions, explore certain business opportunities, dispose of assets and take other actions; and

• limit our ability to borrow additional funds in the future, if we need them, due to applicable financial and restrictive covenants in our debt agreements.

If our debt levels increase, the related risks that we face will also increase. If we fail to generate sufficient cash flow from future operations to meet our debt service obligations, we may need to seek refinancing of all or a portion of our indebtedness or obtain additional financing in order to meet our obligations with respect to our indebtedness. We cannot assure you that we will be able to refinance any of our indebtedness or obtain additional financing on satisfactory terms or at all, particularly because of our high levels of debt and the debt-incurrence restrictions imposed by our current debt agreements.

If we do not generate a sufficient amount of cash, which depends on many factors beyond our control, our liquidity and our ability to service our indebtedness and fund our operations would be harmed.

Based on our current level of operations and anticipated revenue growth, we believe our cash flow from operations, available cash, including from the net proceeds of our recent common stock offering, and available borrowings under our credit facilities will be adequate to meet our future liquidity needs. However, we have substantial working capital needs, contractual commitments and debt service obligations. We cannot assure you that our business will generate sufficient cash flow from operations, that our anticipated revenue growth will be realized or that future borrowings will be available to us under credit facilities in amounts sufficient to enable us to pay our existing indebtedness or fund our other liquidity needs. In addition, if we undertake expansion efforts in the future, our cash requirements may increase significantly.

The industry in which we operate is strictly regulated at both the federal and state level. Changes in current laws and regulations, or the application of future laws and regulations, may have a significant negative impact on our business, results of operations and financial condition.

Our business is subject to numerous state and certain federal laws and regulations which are subject to change and which may impose significant costs or limitations on the way we conduct or expand our business. These regulations govern or affect, among other things:

• check cashing fees;

• licensing and posting of fees;

• lending practices, such as truth in lending;

• interest rates and usury;

• currency reporting;

• recording and reporting of certain financial transactions;

• franchising in the states in which we offer and sell franchises;

• privacy of personal consumer information; and

• prompt remittance of proceeds for the sale of money orders.

As we develop new services, we may become subject to additional federal and state regulations. In addition, changes in current laws and future laws or regulations may restrict our ability to continue our current methods of operation or expand our operations and may have a material adverse effect on our business, results of operations and financial condition. States may also seek to impose new licensing requirements or interpret or enforce existing requirements in new ways.

Short-term consumer loan services have come under increased scrutiny and regulation. If the restrictions created by such regulations increase, or if short-term consumer loans become prohibited in the states where we offer these loans, our business would be materially adversely affected.

A significant portion of our revenues is based on loan interest and fees from short-term consumer loans, also known as payday loans, that we offer in our company-owned stores. Short-term consumer loans have come under increased scrutiny and regulation in recent years. For example, in October 2002, the Federal Trade Commission sent an Information and Documentation Request to several national companies that offer short-term consumer loans, including us. This industry-wide review may result in recommendations regarding the short-term consumer loan industry or specific conclusions about us, either of which may negatively affect our operations.

Also, 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 may prohibit or severely restrict short-term consumer loans. For example, in December 2002, we ceased offering short-term consumer loans at our stores in Alabama, Georgia and North Carolina as a result of laws enacted restricting short-term consumer loans in those states. As a result of more recently enacted laws in Alabama permitting short-term consumer loans, we have recently resumed offering short-term consumer loans at our company-owned store in that state. We intend to continue, with others in the short-term consumer loan industry, to inform and educate legislators and to oppose legislative or regulatory action that may prohibit or severely restrict short-term consumer loans. Nevertheless, if legislative or regulatory action with that effect were taken on the federal level or in states in which we have a significant number of stores, that action may have a material adverse effect on our loan-related activities and revenues. Moreover, similar action by states in which we are not currently offering short-term consumer loans could result in us having fewer opportunities to pursue our growth strategy.

In 2002, the Office of the Comptroller of the Currency, which supervises national banks, took action to effectively prohibit certain national banks from offering and making short-term consumer loans because of the

agency’s view that they posed various risks to those banks. As a result, we discontinued offering Goleta loans in our stores on December 31, 2002.

In addition, Republic Bank & Trust Company, a Kentucky state-chartered bank for which we act as marketer and servicer of its short-term consumer loans, is subject to federal and state banking regulations. The State of Kentucky is the primary regulator of Republic Bank, and the Federal Deposit Insurance Corporation, or FDIC, is the back-up federal regulator of Republic Bank. If the State of Kentucky or the FDIC were to order Republic Bank to cease or significantly curtail its short-term consumer lending services, our revenues derived from fees from Republic Bank would be adversely affected, unless we could secure an agreement to provide similar services with another bank not subject to similar regulations. We cannot assure you that we would be successful in finding such a replacement bank, especially as arrangements like ours with Republic Bank are coming under increasing political and regulatory scrutiny. Lawsuits filed against banks offering these short-term consumer loans, such as one recently filed by the New York State Attorney General’s office discussed below, may hinder our ability to partner with a replacement bank or to establish relationships with new banks in other states as part of our growth strategy. Any agreement with a replacement bank or new bank may also not be on terms as favorable to us as our current agreement with Republic Bank.

Republic Bank is also subject to FDIC inspection and authority, and as a result of our marketing servicing activities, we too are subject to such inspection and authority. We cannot assure you that the regulatory scheme affecting Republic Bank, or FDIC inspection or authority with respect to Republic Bank or us, will not negatively impact our operations.

Potential litigation and regulatory proceedings regarding our short-term consumer loans could materially adversely affect our financial condition.

During the last few years, we and our competitors have been subject to regulatory proceedings, class action lawsuits and other litigation regarding the offering of short-term consumer loans. In our case, such litigation and regulatory proceedings primarily involved attempts by plaintiffs to recharacterize us as the true lender of short-term consumer loans made by Goleta National Bank through our stores, in part because we acquired participations in the Goleta loans. Although our relationship with Goleta has been terminated and we have settled the related class action lawsuit, we cannot assure you that we will not be subject to future lawsuits associated with our short-term consumer loan services.

In particular, we may become subject to litigation or regulatory proceedings focusing on our relationship with Republic Bank. If we were to be recharacterized as the lender of these Republic Bank loans, then the interest charged for these loans would violate most of the applicable states’ usury laws which impose maximum rates of interest or finance charges that a non-bank lender may charge, and any resulting refunds or penalties we would likely incur would materially adversely affect our results of operations and financial condition. While there are differences between the Goleta loans and the Republic Bank loans, principally that we do not acquire participations in Republic Bank loans, and while we believe we are not the lender under this arrangement with Republic Bank, we cannot assure you that a regulator or a borrower will not try to recharacterize us as the true lender. For example, although we do not offer short-term consumer loans in New York, recently the New York State Attorney General’s office filed a lawsuit against a Delaware state-chartered bank and the companies servicing its short-term consumer loans through a structure that is in some respects similar to our agreement with Republic Bank.

Media reports and public perception of short-term consumer loans as being predatory or abusive could materially adversely affect our business.

Over the past few years, consumer advocacy groups and certain media reports have advocated governmental action to prohibit or severely restrict short-term consumer loans. The consumer groups and media reports typically focus on the cost to a consumer for this type of loan, which is higher than the interest typically charged by credit card issuers to a more creditworthy consumer. This difference in credit cost is more significant if a consumer does not promptly repay the loan, but renews, or rolls over, that loan for one or more additional short-term periods. The consumer groups and media reports typically characterize these short-term consumer loans as predatory or abusive toward consumers. If this negative characterization of our short-term consumer loan service becomes increasingly

accepted by consumers, demand for our short-term consumer loans could significantly decrease, which could materially adversely affect our results of operations and financial condition.

Negative perception of our short-term consumer loans or other activities could also result in us being subject to more restrictive laws and regulations. For example, a short-term consumer loan prohibition law was recently passed by the Georgia state legislature. In addition, we may become subject to lawsuits against us for our ACE Loans or Republic Loans. If changes in the laws affecting our short-term consumer loans or the Republic Bank loans are enacted, or if we become subject to such lawsuits, our financial condition and results of operations would be materially adversely affected.

If our estimates of our loan losses are not adequate to absorb known or probable losses, our financial condition may be materially adversely affected.

We maintain an allowance for loan losses at levels to cover the anticipated losses in the collection of our ACE Loan portfolio. We determine our allowance for loan losses based upon a review of historical loan losses and the loan portfolio. Our allowance for loan losses is periodically reviewed by our management. For the three months ended September 30, 2004, our loan loss provision was $5.1 million, and we charged-off $3.7 million related to our loans. Our loan loss provision, however, is an estimate, and if actual loan losses are materially greater than our loan loss provision, our financial condition could be materially adversely affected.

With respect to the Republic Loans, we are obligated to reimburse Republic Bank for loan losses on a quarterly basis. As a result, we could be potentially obligated to pay Republic Bank for loan losses in an amount up to the total outstanding amount of Republic Loans recorded on Republic Bank’s financial statements, which was $10.0 million as of September 30, 2004. This amount is not included on our balance sheet. For the three months ended September 30, 2004, we provided a payable of approximately $2.3 million for losses on Republic Loans and charged-off $1.5 million related to Republic Loans. The balance of the liability for Republic Loan losses reported in accrued liabilities as of September 30, 2004 was $0.2 million. The payable to Republic Bank is, however, an estimate. If actual Republic Loan losses are materially greater than our recorded amount payable to Republic Bank, our financial condition could be materially adversely affected.

A significant portion of our consumer lending business is derived from our relationship with Republic Bank, and a loss of that relationship could adversely affect our liquidity and profits.

Under our marketing and servicing agreement with Republic Bank, we provide various services to the bank in connection with our marketing and servicing of Republic Loans in exchange for which we are compensated by Republic Bank through payment of fees. As of September 30, 2004, Republic Bank was offering its Republic Loans in 387 of our company-owned stores in Arkansas, Pennsylvania and Texas. Approximately 11.7% of our total revenues in the three months ended September 30, 2004 were derived from fees paid to us by Republic Bank.

The FDIC has set limits on the dollar amount of short-term consumer loans Republic Bank can have outstanding at any given time based on its capital. If the FDIC were to reduce these limits or other events involving Republic Bank outside of our control were to occur, our ability to grow this portion of our business could be materially adversely affected. In addition to customary termination provisions, our agreement with Republic Bank can be terminated by either party if the quarterly loan loss rate of Republic Loans exceeds a specified level.

If a termination of or significant adverse change in our relationship with Republic Bank occurred, we could be required to seek replacement relationships with new financial institutions. We cannot assure you that we would be able to secure new relationships or that the terms of any such new relationships would be as favorable to us as those of our existing relationship with Republic Bank. As a result, any significant changes in our relationship with Republic Bank could cause us to change the way we conduct business in certain states or adversely affect our results of operations.

If Republic Bank’s loan approval process is flawed and more loans go uncollected, our revenues could be adversely affected.

Our agreement with Republic Bank provides for us to market and service Republic Loans offered at our company-owned stores. Republic Bank is responsible for reviewing each loan application and determining whether such application is approved for a loan. We are not involved in the loan approval process, including with respect to determining the loan approval procedures or criteria. However, under our agreement with Republic Bank, we are required to reimburse Republic Bank for loan losses on a quarterly basis. If Republic Bank’s loan approval process is flawed and an increased number of loans that are made are uncollected, our results of operations could be adversely affected.

We are subject to franchise law and regulations that govern our status as a franchisor and regulate some aspects of our franchise relationships. Our ability to develop new franchised stores and to enforce contractual rights against franchisees may be adversely affected by these laws and regulations, which could cause our franchise revenues to decline and adversely affect our growth strategy.

We are subject to federal and state laws and regulations, including the regulations of the Federal Trade Commission as well as similar authorities in individual states, in connection with the offer, sale and termination of franchises and the regulation of the franchisor-franchisee relationship. Our failure to comply with these laws could subject us to liability to franchisees and to fines or other penalties imposed by governmental authorities. In addition, we may become subject to litigation with, or other claims filed with state or federal authorities by, franchisees based on alleged unfair trade practices, implied covenants of good faith and fair dealing, payment of royalties, location of stores, advertising expenditures, franchise renewal criteria or express violations of franchise agreements. We cannot assure you that we will not encounter compliance problems from time to time or that material disputes will not arise with one or more franchisees. Accordingly, our failure to comply with applicable franchise laws and regulations, or disputes with franchisees, could have a material adverse effect on our results of operations financial condition and growth strategy.

Our current and future business growth strategy involves new store acquisitions and new store openings, and our failure to manage our growth or integrate or manage new store acquisitions may adversely affect our business, prospects, results of operations and financial condition.

Our expansion strategy consists principally of combining acquisitions and new store openings (both company-owned and franchised stores) and increasing comparable store sales of existing services. Acquisitions may entail numerous integration risks and impose costs on us, including:

• difficulties in assimilating acquired operations or services, including the loss of key employees from acquired businesses;

• diversion of management’s attention from our core business;

• dilutive issuances of our equity securities (if necessary to finance acquisitions or new stores);

• incurrence of additional indebtedness (if necessary to finance acquisitions or new stores);

• assumption of contingent liabilities;

• the potential impairment of acquired assets; and

• incurrence of significant immediate write-offs.

Our continued growth is dependent upon a number of factors, including the availability of adequate financing and suitable store locations, acquisition opportunities and experienced management employees, the ability to obtain any required government permits and licenses and other factors, some of which are beyond our control. We cannot assure you that we will be able to grow our business successfully through acquisitions and new store openings. Our failure to grow or complete the integration of any acquired business could have a material adverse effect on our business, prospects, results of operations and financial condition.

If we lose key management or are unable to attract and retain the talent required for our business, our operating results and growth could suffer.

Our future success depends to a significant degree upon the members of our senior management, particularly Jay Shipowitz, our President and Chief Executive Officer. The loss of the services of Mr. Shipowitz or other members of senior management could harm our business and development. Our continued growth also will depend upon our ability to attract and retain additional skilled management personnel. If we are unable to attract and retain personnel as needed in the future, our operating results and growth could suffer.

Competition in the retail financial services industry is intense and could cause us to lose market share and revenues.

The industry in which we operate is highly fragmented and very competitive. In addition, we believe that the market will become more competitive as the industry matures and consolidates. We compete with other check cashing stores, short-term consumer lenders, grocery stores, banks, savings and loan institutions, other financial services entities and other retail businesses that also cash checks, offer short-term consumer loans, sell money orders, provide money transfer services, or other similar financial services. Some of our competitors that are not check cashing companies have larger and more established customer bases and substantially greater financial, marketing and other resources. Our stores have also recently been facing competition from automated check cashing machines deployed in supermarkets, convenience stores and other public venues by large financial services organizations. We cannot assure you that we will be able to compete successfully. As a result, we could lose market share and our revenues could decline, thereby affecting our ability to generate sufficient cash flow to service our indebtedness and fund our operations.

Our revenues and net income from check cashing services may be materially adversely affected if the number of consumer check cashing transactions decreases or the amount of checks we cash that are uncollected significantly increases.

Historically, over half of our revenues come from our check cashing business. Any changes in economic factors that materially adversely affect consumer transactions could reduce the volume of transactions that we process and have a material adverse effect on our business, financial condition and results of operations. Recently, there has been increasing penetration of electronic banking services into the check cashing and money transfer industry, including direct deposit of payroll checks and electronic transfer of government benefits. To the extent that checks are replaced with such electronic transfers, demand for our check cashing services could decrease.

In addition, the risk that we assume upon cashing a check is that the check will be uncollected because of insufficient funds, stop payment orders, or fraud. If the amount of checks we cash that are uncollected increases significantly, our net income will be materially adversely affected.

Our money transfer and money order revenues are derived from a key third-party relationship and a loss of that relationship could adversely affect our liquidity and profits.

We are a party to a money order agreement with Travelers Express under which we exclusively sell Travelers Express money orders that bear our logo. Under this agreement, we are obligated to make prompt remittances of money order proceeds. We are also an agent for the receipt and transmission of wire transfers of money through the MoneyGram network in accordance with an agreement with Travelers Express and MoneyGram Payment Systems, Inc., an affiliate of Travelers Express. Approximately 7.4% and 7.1% of our total revenues for the three months ended September 30, 2004 and for the fiscal year ended June 30, 2004, respectively, were derived from these agreements. Our relationship with Travelers Express and its affiliates is therefore significant to our business. Accordingly, if any disruption in this relationship occurs, it could materially and adversely affect our liquidity and profits.

Any disruption in the availability of our information systems could adversely affect operations at our stores.

Our information systems include a proprietary point-of-sale system in our stores and a management information system. The personal computer-based point-of-sale system is fully operational in all company-owned stores, is used by our self-service machines for cashing checks and accepting third-party bill payments and is licensed for use by our franchised stores. The management information system is designed to provide summary and detailed information to district managers, regional vice presidents and corporate managers at any time through internet connectivity. Any disruption in the availability of our information systems could affect our operations and could adversely affect our business.

Part of our business is seasonal, which causes our revenues to fluctuate and may adversely affect our ability to service our debt.

Our business is seasonal to the extent of the impact of cashing tax refund checks and tax refund anticipation loan checks. The impact of these services is primarily in the third and fourth quarters of our fiscal year. Also, our short-term loan business declines slightly in the third fiscal quarter as a result of customers’ receipt of tax refund checks and tax refund anticipation loans. This seasonality requires us to manage our cash flows over the course of the year. If our revenues were to fall substantially below what we would normally expect during certain periods, our annual financial results would be adversely impacted and our ability to service our debt may also be adversely affected.

Because we maintain a significant supply of cash in our stores, we may be subject to cash shortages due to employee error and theft.

Since our business requires us to maintain a significant supply of cash in each of our stores and (during tax season) each of our self-service machines, we are subject to the risk of cash shortages resulting from employee errors and theft. Although we have implemented various procedures and programs to reduce these risks, maintain insurance coverage for theft and provide security for our employees and facilities, we cannot assure you that employee error and theft will not occur. Material occurrences of error and theft could lead to cash shortages and could adversely affect our results of operations.

Risks Related to our Common Stock

The price of our common stock may be volatile.

In the past three years, stocks listed on the Nasdaq National Market, as our common stock is, have experienced high levels of volatility and significant declines in value from their historic highs. The trading price of our common stock has fluctuated, and may continue to fluctuate, substantially from time to time. The fluctuations could cause you to lose part or all of your investment in our shares of common stock. Those factors that could cause fluctuations in the trading price of our common stock include, but are not limited to, the following:

• price and volume fluctuations in the overall stock market from time to time,

• significant volatility in the market price and trading volume of financial services companies,

• actual or anticipated changes in our earnings or fluctuations in our operating results or in the expectations of securities analysts,

• general economic conditions and trends,

• major catastrophic events,

• loss of a significant client or clients,

• sales of large blocks of our stock, or

• departures of key personnel.

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Due to the potential volatility of our stock price, we may therefore be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.

Insiders have substantial control over us and could limit your ability to influence the outcome of key transactions, including a change of control.

As of September 30, 2004, our principal shareholders, directors and executive officers, and entities affiliated with them, owned approximately 15% of the outstanding shares of our common stock. As a result, these shareholders, if acting together, are able to influence or control matters requiring approval by our shareholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. The concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our shareholders of an opportunity to receive a premium of their common stock as a party of a sale of our company and might ultimately affect the market price of our common stock.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks, particularly including changes in interest rates that might affect the costs of our financing under our existing credit agreement. To mitigate the risks of changes in interest rates, we use derivative financial instruments. We do not use derivative financial instruments for speculative or trading purposes. To reduce our risk of greater interest expense because of interest-rate fluctuations, we have entered into interest-rate swap agreements, which effectively converted a portion of our floating-rate interest obligations to fixed-rate interest obligations, as described in Note 3 to Notes to Interim Consolidated Financial Statements.

The fair value of our existing interest-rate swaps was a liability of ($486,000) as of September 30, 2004. The associated underlying debt has equaled or exceeded the notional amount for each swap throughout the existence of the swap, and we anticipate that it will continue to do so. Each existing swap is based on the same index as, and repriced on a consistent basis with its corresponding underlying debt.

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that those disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting during the quarter ended September 30, 2004, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved from time to time in various legal proceedings incidental to the conduct of our business. Management believes that no current legal proceedings will result in any material impact on the Company’s financial condition and results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS


Exhibit Number		Exhibit
	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	ACE CASH EXPRESS, INC.

November 5, 2004	By:	/s/ WILLIAM S. MCCALMONT

		William S. McCalmont
		Executive Vice President and
		Chief Financial Officer
		(Duly authorized officer and
		principal financial officer)


		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Interim Consolidated Financial Statements:
	Consolidated Balance Sheets as of September 30, 2004 (unaudited) and June 30, 2004		3
	Interim Unaudited Consolidated Statements of Earnings for the Three Months Ended September 30, 2004 and 2003		4
	Interim Unaudited Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2004 and 2003		5
	Notes to Interim Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		35
Item 4.	Controls and Procedures		35
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		35
Item 3.	Defaults Upon Senior Securities		35
Item 4.	Submission of Matters to a Vote of Security Holders		36
Item 5.	Other Information		36
Item 6.	Exhibits		36
SIGNATURES			36
INDEX TO EXHIBITS			37
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

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[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2004


[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to

(1)		Calculated based on changes in revenue for all company-owned stores open in both periods and open for at least 13 months.

(2)		Operating data for ACE loans include short-term consumer loans made by Goleta National Bank at our company-owned stores until we discontinued offering Goleta loans on December 31, 2002.

(3)		Republic Bank loans are short-term consumer loans made by Republic Bank & Trust Company at our company-owned stores in Arkansas, Pennsylvania and Texas since January 1, 2003.

-		our consolidated net worth at any time cannot be less than $133.7 million plus 75% of all net income earned in a calendar quarter, without deduction for any quarterly losses, plus 100% of the proceeds of any equity offering;

-		at the end of any fiscal quarter, our debt-to-EBITDA ratio cannot be more than 2.75-to-1.00 through December 31, 2005 and 2.50-to-1.00 thereafter;

-		at the end of each fiscal quarter, our cash flow coverage ratio cannot be less than 1.25-to-1.00.

•		incur additional indebtedness;

•		pay dividends and make distributions in respect of our capital stock;

•		restrict our operational flexibility, because of restrictive covenants that will limit our ability to make acquisitions, explore certain business opportunities, dispose of assets and take other actions; and

•		limit our ability to borrow additional funds in the future, if we need them, due to applicable financial and restrictive covenants in our debt agreements.